Anything But Normal

In “Lack of Lending to Creditworthy Borrowers Restricting Housing: Bernanke,” HousingWire details remarks from the Fed Chairman on the state of the U.S. mortgage finance market.

Mortgage originators who are reluctant to extend credit to potential borrowers who meet underwriting standards set by Fannie Mae and Freddie Mac are hindering the nation’s economic turnaround.

Fed Chairman Ben Bernanke, speaking Friday at the International Builders Show in Orlando, Fla., said the wave of creditworthy households that are finding it difficult to obtain mortgage credit or to refinance is resulting in actions taken by the Federal Reserve — such as lowering interest rates to record lows — is helping to prevent a boost to the housing industry.

Fewer than half of lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%, even though such loans are within the government-sponsored enterprises’ purchase parameters.

Bernanke referrenced a number of possibilities that could explain the reluctance.

He said that because borrowers are unable to obtain private mortgage insurance required by the GSEs, the weakened finances of private mortgage insurers could be damping mortgage credit availability for some potential borrowers. In other cases, lenders may be concerned about high servicing costs if mortgages become delinquent.

Another set of concerns relates to representations and warranties, which are contractual commitments by an originator concerning the quality of the loan.

The contracts are designed to protect the GSEs or other purchasers of loans, but originators appear uncertain about how they will be enforced going forward and thus have been very cautious about making loans that could be viewed as less than perfect from an underwriting perspective.

If Mr. Bernanke’s explanations are correct, that would suggest a key part of the U.S. financial system remains broken, putting paid to the notion set forth by Treasury Secretary Timothy Geithner (and others) that things are returning to normal.

Then again, there could be another explanation. Since interest rates represent the price of money and mortgage rates are near all-time lows, wouldn’t that indicate that the supply of loanable funds, including mortgages, far exceeds the demand? Based on the laws of economics — which I’m sure Mr. Bernanke is well aware of — wouldn’t that imply that qualified borrowers should have no problem getting a loan?

Unless, of course, you have a situation akin to that which exists in dysfunctional third world countries, where the “official” rates tend to be far different than those found in the shadow, or “black,” economy. That, too, would indicate that current conditions are anything but normal (if history is any guide). It also suggests that that those who are relying on official statistics to assess the health of the economy may be making a serious mistake.

Either way, it’s hard to see how the current situation could be seen in anything other than a negative light, no matter how hard you spin it.