The Wall Street Journal
By: Nick Timiraos & Maurice Tamman
June 25, 2011
The percentage of mortgage applications rejected by the nation's largest lenders increased last year, spotlighting how banks' cautious lending practices are hampering the nascent housing market recovery.
In all, the nation's 10 largest mortgage lenders denied 26.8% of loan applications in 2010, an increase from 23.5% in 2009, according to an analysis by The Wall Street Journal of mortgage data filed with banking regulators.
Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.
"As the noose on credit availability tightens, credit is being choked off at a time when the housing market is extremely fragile," says Laurie Goodman, senior managing director at Amherst Securities Group LP.
Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles, counters that "banks are doing what they need to do" to change lending standards in the wake of a "crazy bubble. "
He adds, "You had decades where credit standards were tougher than they are even now."
Among the would-be borrowers having a harder time are those who have seen their incomes fall or interrupted by a period of unemployment, scenarios that have become increasingly common in recent years. Some self-employed applicants are also hitting barriers to loans--hurdles they didn't face in the past.
Lending standards are still tight in part because government entities Fannie Mae, Freddie Mac, and the Federal Housing Administration, which collectively account for more than nine in 10 loans being made today, are under heavy pressure to avoid any losses.
Those firms don't make loans directly but instead purchase or guarantee mortgages that meet their standards, and so have significant influence over which loans banks are willing to approve.
Lou Barnes, a third-generation mortgage banker in Boulder, Colo., says lenders have grown too cautious.
Fannie and Freddie, in particular, "are behaving like a hurricane insurance company that won't write any policies within 200 miles of an ocean."
Fannie Mae, for its part, says tighter loan restrictions, while painful for the housing market, are necessary to correct past excesses.
"Clearly we got too loose. This is a return to historical standards," says Doug Duncan, Fannie's chief economist. "When markets were stable and these standards were applied, you didn't hear the same complaints."
On Tuesday, Mr. Barnes told Amy Menell that his bank wouldn't be able to approve her for a loan even though she has a credit score above 800, no debt and is willing to put down more than 50% on a $400,000 house in Boulder, Colo. Ms. Menell, a mother of three who is finalizing a divorce and receiving a cash settlement of $400,000, wants to take advantage of low interest rates and the depressed housing market to buy a home.
But Ms. Menell works as a real estate agent and had little income in 2009, when the housing market slowed.
That has left her without the two years of documented income the bank wants for her loan application, even though she says business has picked up over the last year.
"I know the housing market inside and out here, and believed that with a significant enough down payment and more assets behind you, that you could get a loan," she says.
Mr. Barnes says that in ordinary times, Ms. Menell would have had no difficulty getting a loan. "Going back as far as there has been banking, if somebody walked in the door with a 50% down payment, good credit, cash in reserve, they'd walk out with a loan," he says.
To be sure, the rejection rates have been higher than they are now, and reached 32.5% at the height of the housing bubble in 2007. That was driven, in part, by brokers and loan officers testing the limits to see just how loose banks were willing to go.
The mortgage data analyzed by The Wall Street Journal included loan applications filed by consumers who wanted to refinance existing mortgages as well as those planning to buy a home. Among home-purchase applications, lenders denied 19.9% of applications, up from 18.2% in the previous year, while 27.2% of refinance applications were denied, up from 24.4%.
Recent surveys by regulators show no sign of credit easing so far this year. Nearly four in 10 banks reported tighter mortgage lending conditions for the 12-months ended in February, according to a survey published this week by the government's Office of the Comptroller of the Currency. Just 8% said that standards had loosened.
The Journal obtained the data from individual lenders in accordance with the Home Mortgage Disclosure Act, which requires lenders to report such figures. The top 10 lenders accounted for more than 70% of loan originations last year, though a substantial percentage of those loans were obtained by the lenders immediately after smaller firms had approved the loans.
The analysis showed that denials increased in every state except Delaware and in all but nine of the top 100 metropolitan areas. Denial rates were highest in Miami, Detroit, and New Orleans, and lowest in Raleigh, N.C.; Bethesda, Md.; and San Jose, Calif.
In Miami, where home prices are down by 50% from their 2006 peak, nearly 44% of loan applications were rejected last year.
The market relies heavily on buyers with cash: In April, nearly 63% of home sales were all-cash deals, according to the Miami Association of Realtors.
There are some limits to what the data can show. Loan officers say that many borrowers are being dissuaded from even applying in the first place, out of fear they won't meet stringent guidelines.
In past economic cycles, lending standards tended to ease within the first year of an economic recovery, and the OCC survey showed that banks have eased underwriting standards for commercial loans over the 12-month period ended in February.
But in the current cycle, lenders have kept standards tight for home loans even though the economy is growing. "There's no question that accessible credit is a problem," says David Stevens, chief executive of the Mortgage Bankers Association, an industry group.
Mr. Stevens, who headed the Federal Housing Administration for two years until March, says a key factor in banks' reluctance to lend more freely is the aggressive effort by Fannie and Freddie to force banks to repurchase loans if they go bad.
In a measure of more-rigid lending standards--and, banks argue, proof they are acting more responsibly--the Federal Housing Finance Agency says that just 0.3% of loans backed by Fannie and Freddie in 2009 have ever recorded three consecutive missed payments, down from 2.6% in 2000.
Refinance loans are harder for many borrowers to get because home values have fallen so sharply over the past four years, leaving many borrowers with much less equity than they thought they had.
The Journal analysis found that insufficient collateral was the most common denial code flagged by lenders when they rejected loan applications.
Other top denial reasons included inadequate debt-to-income ratios and poor credit histories.
Adam Bauer, who says his family is pressed for space in its two-bedroom home in Belmont, Calif., has found new hurdles in getting a loan, even though he obtained a mortgage for his current home without difficulty in 2004. Tax returns for the 47-year old information-technology consultant show that his income declined in 2009 due to losses on a start-up business.
Mr. Bauer and his wife have always tried to maintain a stellar credit profile because even before deciding to purchase a new home, they expected to refinance their current adjustable-rate mortgage. They each have a credit score of at least 780, have no credit-card debt, and have more than 20% equity in their home. "We've been preparing for this for years, and we're really surprised we're not having an easier go," he says.
He says one loan officer said that based on the income shown on his tax returns, he wouldn't qualify today for the $537,000 loan he already has on his current property, let alone the $900,000 loan he is seeking to buy a larger house.
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