Housing Mortgage Market Reform Key to Housing Recovery
WASHINGTON (May 15, 2012) – A sustainable housing recovery requires that policymakers move forward with the difficult decisions regarding the future of the mortgage market. That's according to Federal Reserve Board Governor Elizabeth Duke, who spoke to Realtors® at a joint Real Estate Services and Regulatory Issues Forum—Prescriptions for Housing Recovery session today during the Realtors® Midyear Legislative Meetings & Trade Expo.
Governor Duke said that it will not be easy to decide what to do about the Government Sponsored Enterprises Fannie Mae and Freddie Mac, or how best to promote a robust secondary market, or what form crucial regulations should ultimately take, but until the mortgage market is addressed there cannot be a full housing market recovery.
"Important issues need to be addressed and hard questions remain to be answered; and it is unlikely that anyone will fully agree with the final decisions that are made. Nevertheless, until these tough decisions are made, uncertainties will continue to hinder access to credit, the evolution of the mortgage finance system, and the ultimate recovery in the housing market," said Duke.
During the forum, Duke said that there are signs that the housing market is gradually improving and noted that although housing prices have continued to fall, the pace of decline has slowed. Duke said that modest improvements in home prices can only be sustained if the demand for homes increases or the inventory of homes for sale falls to meet the current weak demand, despite tight inventories in some markets.
Most important to the health of the housing market is the strength of the economic recovery, and particularly the labor market, said Duke. She said potential homeowners are unwilling to buy if they are uncertain about their job and income prospects. Duke also said that credit standards remain tight as lenders correct for the lax lending standards that were prevalent during the housing boom and continue to be concerned about borrowers' ability to repay.
"Unfortunately, some buyers who would like to purchase a home are unable to do so because they cannot obtain a mortgage," said Duke. She said the tightening of credit standards is apparent in the credit scores of borrowers, noting that the median credit score of borrowers rose from 700 in 2006 to 760 in 2009, where it remains today.
Duke added that tight credit standards have made obtaining a mortgage particularly difficult for first-time home buyers, since they tend to be younger than other homebuyers, and have lower credit scores and fewer financial assets.
She said that uncertainties about the future are also likely contributing significantly to the tight lending standards in credit markets. Duke said that because of the uncertainty surrounding the future structure of the GSEs and the role the government should play in the mortgage market, private capital has been reluctant to enter the market.
"Just as uncertainty about job prospects or house prices has likely discouraged some potential buyers from purchasing homes, it is likely that uncertainty has also affected mortgage lenders," said Duke. "Uncertainty surrounds several key aspects of mortgage lending, including the strength of the economic recovery and the trajectory of future house prices; the costs and liabilities associated with originating and servicing mortgage loans; and the future structure of the mortgage market."
Regulatory uncertainties are also impacting the cost and availability of mortgage credit, said Duke, who cited two impending rules from the Consumer Financial Protection Bureau. Those rules will define a Qualified Mortgage (QM), a borrower's ability to repay, and the related qualified residential mortgage (QRM), which would exempt lenders from risk retention requirements required by the Dodd-Frank Act.
"Given the role that poor lending decisions played in the financial crisis, it is appropriate that lenders have tightened their lending standards," said Duke. "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."
Panelist Michael A. Stegman, counselor to the Secretary of Treasury for Housing Finance Policy, agreed with Governor Duke that mortgage lending continues to be tight. He said that banks today are far less likely than they have been in the past to originate loans for individuals with credit scores below 720 and down payments of less than 20 percent. Stegman said the country's leaders must take action and not wait for market to hit bottom. There are no easy answers, no single policy that will solve all the problems the industry faces, said Stegman.
He said government loan modification and short sale programs have aided the recovery, but more needs to be done to help homeowners and the struggling housing market. Stegman credited Realtors® for their efforts to help streamline short sale transactions and said lenders must continue to make the short sale process easier for borrowers by shortening timelines and developing standards.
J. Lennox Scott, chairman and CEO of John L. Scott Real Estate, Bellingham, Wash., also urged legislators and regulators to make decisions and establish rules that allow reasonable access to credit for homebuyers and not hinder the housing market recovery. Scott said the proposed QRM rule that would require a 20 percent down payment from homebuyers would negatively impact consumers, especially first-time buyers, and should not be implemented. "We cannot put policies in place today that will hurt creditworthy first-time home buyers for years to come," said Scott.
The National Association of Realtors®, "The Voice for Real Estate," is America's largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
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