Despite the fact that both home values and market prices have fallen precipitously since the housing bust four years ago, very few prospective homebuyers have a wad of money big enough to plunk down on a cash sale. As the housing market struggles to get back on its foundation, it is being hobbled by a lack of competition, whereby a few heavy hitters are dominating the mortgage business, as well as the fact that many lending institutions have become very stingy with mortgages -- so stingy, in fact, that experts allege that too often even eligible borrowers are unable to obtain them.
Banks are still stinging from the financial crisis
Federal Reserve Chairman Ben Bernanke recently spoke of this issue as he addressed a Chicago banking conference earlier this month. Bernanke noted that qualified borrowers able to put down 20% on a home are being refused, and estimated that mortgage lending has retreated by 13% from a few years ago. Housing Secretary Shaun Donovan postulates that between 10% and 20% of worthy borrowers are being frozen out of the housing market because of banks' reluctance to extend credit.
While noting that banks are recovering nicely from the housing meltdown, Bernanke referenced a Fed survey of loan officers showing that unduly strict lending practices are the result of banks fearing a repeat of the crisis, as well as put-back risk. Federal Reserve board member Elizabeth Duke echoed this sentiment in a recent speech to the National Association of Realtors. Referring to the same studies as Bernanke, she observed that 80% of loan originators surveyed fear having to take back loans from Freddie Mac or Fannie Mae if they are deemed too risky, or if the loan documents contain even slight errors. These fears have resulted in loans being approved for only a very small segment of mortgage applicants -- those with credit scores of 720 or more, as well as a 20% down payment.
Some banks, at least, are becoming proactive and are checking and double-checking loan applications, appraisals, and other mortgage documents, looking for errors or outright fraud. Data auditing firms are often engaged to check on all borrower information as well as for any funny business on the part of commission-hungry real estate agents and loan officers. Even the IRS is pitching in, segueing to all-electronic income-verification checks to help expedite the loan process.
Big banks are crowding out competitors
Another issue concerns competition in the mortgage lending industry. Edward DeMarco, acting director of the Federal Housing Finance Agency, also spoke at the Realtors' meeting, addressing the large mortgage market share held by very few lending institutions. DeMarco noted that Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), US Bancorp (NYSE: USB), and JPMorgan Chase (NYSE: JPM) now command 54% of the market, compared with 42% six years ago.
Currently, Wells Fargo originates over one-third of all mortgage loans, having taken advantage of market retreats by Bank of America and other lenders after the housing bubble burst. Next in line is JPMorgan with over 10%, followed by US Bancorp with a little over 5%. US Bancorp is a new member of the top three, edging out B of A and Citigroup (NYSE: C), which also cut back on lending after the crisis and recently announced that it, like JPMorgan, will no longer write loans obtained through mortgage brokers.
Can regulation help?
Regulators may be able to use Dodd-Frank to address both of these issues, and smaller banks will be watching carefully to make sure that the new rules don't exacerbate the advantages now enjoyed by the big banks. For his part, DeMarco seems cognizant of the problem, as some small banks said they're becoming paralyzed by the myriad new regulations and mounds of paperwork required by Dodd-Frank to accompany each new loan. Indeed, there is well-placed concern that drowning small banks, with limited staff, in additional bureaucracy will only make them more apt to be absorbed by larger banks, thereby reducing the pool of mortgage services even further.
As far as the put-back risk goes, Fannie and Freddie have both exempted banks from this burden as far as the Home Affordable Refinance Program goes, so it's not out of the realm of possibility that some relief could be found for other mortgage loans as well. The fact that banks are afraid to push the mortgage envelope at all combined with the increased scrutiny that each mortgage loan application is given these days seem to point to the fact that banks have at least learned some hard lessons from the mortgage crisis. Of course, processing a loan that has been thoroughly vetted by the bank or its agents should put some of the put-back fears to rest, and may have a calming effect as more banks opt for the additional checks.
It will become more important that these issues become reconciled as fewer foreclosures clog the market and true arms-length property offerings once again become the norm. The housing market can't rebound without property sales, a situation that both regulators and banks need to work on -- together.
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