Change in Lending Practices

Change in Lending Practices Could Stimulate Housing Market

Monica Schaefer

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Since 2005, the news has inundated Americans with reports of the bursting housing bubble or the sub-prime mortgage crisis and many people are wondering what will it take to restore the housing market?

While there are many factors that are keeping the housing market from bouncing back, one of the key components may be the lack of available credit for potential buyers.

Not long ago it seemed that your teenager, employed at the local mini-mart, could have qualified for a loan for a $500,000 home. While liberal lending practices ultimately lead to the sub-prime mortgage mess, it is the current stringent lending practices that may be holding the housing market back from recovery.

Federal Reserve Chairman Ben Bernanke recently spoke to the National Association of Home Builders and addressed various aspects of the current housing market and their effect on a reemerging housing market.

Many local markets have an overhang of empty and foreclosed homes, and many potentially creditworthy homebuyers cannot obtain mortgages. The weak housing market also impairs homeowners’ financial health and diminishes the quality and stability of neighborhoods and communities. For these reasons, and because the troubled housing market depresses construction activity and employment, we need to continue to develop and implement policies that will help the housing sector get back on its feet. No single solution will be sufficient.

While Bernanke states that "No single solution will be sufficient", there are sources that believe that new lending practices could bring a glimmer of hope to potential homebuyers.

One of these practices concerned the handling of loan-to-value ratios and was discussed in a recent article called "Housing Crisis to End in 2012 as Banks Loosen Credit Standards"published by

Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings. Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes the clearest sign yet of an improvement in mortgage credit conditions.

While the banks may be reevaluating their lending practices, the requirements for qualifying for a loan appear to remain stringent. According to the most recent edition of The MarketPulse™ from CoreLogic:

Both FICO scores and DTI (debt-to-income) ratios for purchase and refiinance borrowers have not moved much over the last few months and the credit and debt box for loans remains as tight as it has been since the peak of the crisis. Check our article, Tips for Improving Your Credit Score. 

CoreLogic’s analysis also found that the average FICO score required for purchase borrowers in 2011 was 735. According to FICO, the average American FICO score is 700 to 725, the result of which is most applicants are unable to qualify for lower interest rate mortgage loans. However, Wells Fargo confirmed in January that they are offering FHA and VA mortgage programs with flexible income, debt and credit requirements with as little as 3.5% down, which would offer opportunities to those with lower FICO scores.

As Bernanke eloquently stated, "No single solution will be sufficient" for turning around the housing market, the news about changes in lending practices is encouraging.

If you are in the market for a home mortgage, take the necessary steps to increase and protect your FICO score. If you find that you have erroneous or outdated items on your credit report, it is important to resolve those issues.