From the WSJ:
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.
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 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.