Credit spigot tightens

From HSH Associates:

Mortgage Rates Higher, Lending Standards Tighter

Mortgage rates ticked a little higher this week, with the average 30-year fixed-rate mortgage rising by three basis points (.03%) to 6.38%, according to the nation’s leading publisher of mortgage prices. Hybrid 5/1 ARMs rose by six basis points, finishing the weekly survey at 6.20%.

The subprime mortgage market fallout has raised concerns that tighter underwriting standards — and possibly tougher regulation overall — might squeeze certain borrowers, preventing some marginally-creditworthy individuals from getting loans. Their inability to borrow money would help to dampen demand for homes at a time when demand is already flagging, thus prolonging the housing “slump”.

The January survey of Senior Lending Officers conducted by the Federal Reserve found that 16% of banks had pulled back from the very liberal lending standards prevalent in 2005 and 2006. The latest survey, from April, sought to quantify which borrowers those tighter rules were affecting, and so broke out the results to a much greater degree.

For “Prime” borrowers, about 15% of the respondents noted “somewhat tighter” standards. Of the lenders who make “non-traditional loans” (defined as Alt-A, Alt-Doc, OptionARMs, and such), some 45% said that lending criteria were “somewhat or considerably tighter,” and of the small number of respondents who make subprime mortgages (the survey covers only banks), a full 56% were making loans under “somewhat or considerably tighter” circumstances.

Well in advance of any kind of Congressional or regulatory direction, the market is doing what it should have done earlier, perhaps as early as 2005: limiting the availability of credit to those who can best afford to manage it. It’s clear that fringe borrowers, particularly those without money for a down payment, those with poor credit, or those unwilling to document their financial lives will either need to conform to more mainstream standards or wait to buy a home until they have built the requisite credit profile.

That said, tighter lending standards are not an unhealthy thing, and overall, credit still seems to be plentiful for the vast majority of borrowers who want to obtain a mortgage. It seems unlikely that standards will tighten further for ‘prime’ borrowers, but the non-traditional and subprime issues have yet to fully run their course.