The Federal Reserve’s latest stimulus plan will have a limited impact on housing if impending rules governing mortgage credit availability result in even tighter lending standards, the National Association of Realtors said in a letter to Federal Reserve Chairman Ben Bernanke today.
On Thursday, the Fed announced a third round of "quantitative easing," or QE3, in which it will buy $40 billion a month in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, and also continue to reinvest principal payments from its holdings of Fannie and Freddie debt and MBS.
The move is intended to keep downward pressure on interest rates, including mortgage rates.
NAR 2012 President Moe Veissi, writing on behalf of NAR members, expressed support for QE3 and Bernanke’s previous "ongoing admonitions that credit standards have become unreasonably tight." He highlighted three controversial regulations — the qualified mortgage (QM), the qualified residential mortgage (QRM), and Basel III bank capital standards — that he said would further restrict mortgage lending should the rules go into effect as proposed.
"If the … rules only serve to further tighten credit, the impact of QE3 is likely to be diminished and only felt among those of substantial wealth and pristine credit. In short, those who need access to affordable credit the least," Veissi said.
QM would establish standards for borrowers’ "ability to pay" the mortgages they seek, while QRM would establish certain baseline standards for safe underwriting and require lenders to retain a 5 percent minimum ongoing stake in any loans they originate that don’t meet QRM requirements.
The regulations are under the aegis of the Consumer Financial Protection Bureau (CFPB), which postponed action on both rules in June after protests from Realtors, builders, banks, unions and consumer groups.
Regarding the QM rule, Veissi said there was still time for the Fed to "weigh in" with the CFPB and "ensure that this rule does not serve to further tighten credit." He specifically noted that, according to a NAR analysis, the proposal to cap debt-to-income ratios at 43 percent would exclude nearly 20 percent of today’s borrowers.
He also said that if the QM is not structured as a "safe harbor" for lenders, limiting their liability from lawsuits and regulatory challenges if they can show that they fully complied with the standards, many lenders will restrict credit even further due to litigation risk.
"Neither of these scenarios will aid in making QE3 effective," Veissi said.
Under the QRM rule, lenders will need to retain a 5 percent minimum ongoing stake in the loans they originate unless they meet certain baseline standards for safe underwriting. As originally proposed, the rule would have forced most lenders to demand minimum 20 percent down payments and require stringent debt-to-income ratios for borrowers receiving the lowest rates and best terms.
"While this would not on its face restrict access to credit, it would clearly increase the cost of credit for a significant percentage of borrowers and likely eliminate a number of borrowers from eligibility," Veissi said.
Basel III, bank capital standards decided by an international committee, will be phased in over six years starting in January and will force banks to hold roughly three times more basic capital than under the current Basel II accord with even higher requirements for the biggest banks, Reuters reported.
"As proposed, the rules severely disadvantage residential and commercial mortgages under most scenarios in terms of risk weighting," Veissi said.
"It is hard not to see how this would increase the cost of mortgage credit and/or reduce access. The Fed should work to ensure that these rules take reasonable steps to reduce risk without inhibiting access to mortgage credit."
According to NAR survey findings, released today, and an analysis of historic credit scores and loan performance, home sales could be notably higher by returning to "reasonably safe and sound" lending standards, which also would create new jobs, NAR said.
"Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year," said Lawrence Yun, NAR’s chief economist, in a statement.
"The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact."
While NAR has projected home sales will rise 8 to 10 percent this year, to about 4.6 million sales, Yun said that figure is still below the range of 5 to 5.5 million sales per year NAR considers "normal."
The monthly survey, the Realtors Confidence Index, is based on more than 3,000 member responses. Members reported continuing tight lending conditions, lenders "taking too long" in approving applications, and lenders requiring "excessive" information from borrowers, NAR said.
Some respondents said lenders appear to be focusing only on loans to individuals with the highest credit scores, NAR added.
For instance, the survey indicated that 53 percent of loans in August went to borrowers with credit scores above 740. By comparison, between 2001 and 2004, only 41 percent of Fannie Mae-backed loans and 43 percent of Freddie Mac-backed loans had credit scores above 740, NAR said.
Similarly, for FHA loans, the average credit score for denied applications was 669 in May, up from 656 for loans actually originated in 2001, NAR said. A prime FHA loan is defined as having a FICO credit score of 660 and above.
"There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash (that) could go a long way toward speeding our economic recovery," Yun said.
NAR said that loan default rates have been "abnormally low" in recent years. The 12-month default rate for mortgage loans averaged just under 0.4 percent of mortgages in 2002 and 2003, which is considered a normal rate, and peaked in 2007 at 3 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans, NAR said.
Since 2009, however, Fannie Mae default rates have averaged 0.2 percent and Freddie Mac’s averaged 0.1 percent, despite high unemployment, NAR said.
"These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards," Yun said.