You Are Good: MN Borrowers Denied Fewer Mortgages

by Alex Stenback on June 27, 2011

For the graphic above, The Wall Street Journal studied data from the Home Mortgage Disclosure Act, which among other things reports the number and reason for denied mortgage applications. 

Here’s the accompanying story, which was headlined  from the “Too-tight-lending standards are hampering the real estate recovery” point of view – within the article the take was a little more balanced.

But as for the underlying question:

Has lending gotten too tight to allow the real estate market to recover?

The answer to that question is getting an increasingly loud and exlamatory ”Yes!” from many quarters – Real Estate and Homebuilding trade groups primarily, but it is important to understand that every denied loan application does not mean a creditworthy borrower was denied justice.

The fact is, with the exception of the outright absence of sub-prime (probably a good thing,) lending standards today are looser that they were in 1998, when this writer joined the business, and if you talk to 20 year veterans, the difference is greater still.

Today, if you have clean credit, documentable /stable income, a modest 3-5% down payment, and your monthly debt obligations (after you include your new mortgage payment) are less than 45-50% of your income, you will get a mortgage virtually anwhere you apply.

Given the above, it is very hard to argue that things are too tight, and if so, exactly where in the above equation would you start? 

About the only area that comes to mind are those with big down payments (as in 30% plus) and lots of liquid assets (as in, cash in the bank or investments sufficient to pay off the mortgage outright or make payments for 30 years) but not much income.  But they are a vanishingly small percentage of applicants, and often pay cash.

In short, the real estate market did just fine for 30 some years with lending standards tougher than they are today, and while goosing the real estate recovery by extending mortgage credit to iffy borrowers may be tempting, it won’t work, and won’t end well.

That said, there are some areas where mortgage lending is too tight, and is harming the market and the broader economy, and this is in the refinance market.

Where is lending too tight? Refinances, that’s where.

Right now there’s a substantial backlog of creditworthy borrowers – perhaps hundreds of thousands, who’d like to refinance, and in some cases desperately need to refinance, and can’t because they have little or no equity in the property, and don’t fit the too-narrow standards for the programs (such as Fannie Mae’s HARP program) designed to help them.

These are borrowers who, despite the economy and due to circumstances entirely beyond their control, have unflinchingly made timely payments on upside down mortgages for going on 4 years, and want nothing more than to adjust their rate down to market levels.  This does not seem a lot to ask, given the circumstances, no?

Yet all too often, the appraised value, or the fact that they have mortgage insurance, or an intractable second mortgage holder, or the fact that their loan is NOT guaranteed by Fannie/Freddie/FHA stops them cold.

This borders on injustice, and could be easily remedied by the powers that be with the stroke of a pen.  It would keep these increasingly frustrated homeowners committed, and head-off many short sales and foreclosures.  It would put millions of dollars into household balance sheets instantly (imagine if all mortgaged-but-upside-down homeowners reduced their payment by $300/mo?) with positive effects for the economy.

It is such a no-brainer that one wonders if anyone Washington is listening, and if so who are they listening to?

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