Lenders Not In A Lending Mood

Good Credit Score PictureOne would think that the two punch combo of low home prices and record low mortgage rates would push the housing industry into the black. Yet a recovery is still a ways away. So what is a major hold up in keeping potential home buyers from purchasing properties?
Credit scores.
One of the main causes of the housing crisis was the rampant subprime mortgages banks gave out to folks who were in no way fiscally prepared to own a home. When these homeowners saw their adjustable rate mortgages skyrocket, their mortgage payments ceased and this had a domino effect on the entire economy due to the large number of subprime mortgages handed out like pez from a dispenser.
Now banks have gone to the other extreme, making it very difficult for even qualified borrowers to get a mortgage. According to FICO, over 25 percent of consumers who have active credit files (roughly 43 million people) have FICO scores of 599 and below. Any score under or below 620 is going to make getting a mortgage an extremely difficult, if not flat out impossible task. So while home prices are low and mortgage rates are at historical lows, the housing industry is stuck in neutral as a vast majority of Americans cannot find a lender who will let them borrow.
Of course, there are other factors prolonging the recovery. Federal Reserve Chairman Ben Bernake recently said “many factors suggest that this situation will be difficult to turn around quickly, including the slow recovery of the economy and housing market, continued uncertainty surrounding the future of the government-sponsored enterprises and cautious attitudes by lenders.”
That cautious attitude by lenders is one of the main hold ups in the recovery. Of course, there is absolutely no reason to return to the anyone-with-a-pulse-lending of yesteryear. First-time home buyers are facing an uphill battle as strict lending standards often eliminate them from getting credit due to lower credit scores, limited financial assets and the fact that they are often young.
“Given the role that poor lending decisions played in the financial crisis, it is appropriate that lenders have tightened their lending standards,” said Federal Reserve Board Governor Elizabeth Duke speaking to Realtors® at a joint Real Estate Services and Regulatory Issues Forum — Prescriptions for Housing Recovery session on Tuesday. “That said, if lenders continue to deny credit to consumers more than is warranted, it will hamper the recovery of the housing market restrain economic growth.”