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Today’s Mortgage Rates Near Record Lows and Reasonible Lending Standards Would Raise Home Sales

Today's mortgage rates just above record lows combined with reasonable lending standards would raise home sales by 500,000 to 700,000 additional homes in the coming year. The National Association of Realtors just released an interesting survey showing home sales could be significantly higher if lenders returned to reasonably safe and sound lending standards.

The Federal Reserve is doing their part to help the housing market by buying mortgage backed-securities and long term Treasuries to drive mortgage rates down to record lows. Current mortgage rates on 30 year conforming loans are around 3.50 percent. Mortgage rates today on 15 year conventional loans are just above record lows at 2.93 percent. Jumbo mortgage rates on 30 year and 15 year jumbo loans are also just above record lows.

The National Association of Realtors chief economist, Lawrence Yun, said if mortgage lending standards return to normal there would be tremendous benefits to the U.S. economy. There would be additional sales of 500,000 to 700,000 homes in the coming year which would add 250,000 to 350,000 jobs in related housing trades and services.

Realtors are concerned over unreasonably tight credit conditions for residential mortgages and lenders taking too long to approve mortgage applications. Lenders are requiring excessive information from borrowers and are only focusing on mortgage loans for borrowers with the highest credit scores.

Back during the housing boom lenders were offering loans without requiring borrowers to provide any information, these "no-doc" loans were handed out without concern whether or not the borrower would actually pay the loan. Since the housing bust lending standards were tightened and remain unreasonably tight.

Home prices over corrected on the down side but housing market conditions have turned the corner, prices have stablized and have gone higher in many areas of the country. Lawrence Yun said “there is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery.  A loosening of the overly restrictive lending standards is very much in order.”

In a National Association of Realtors survey 53 percent of loans in August went to borrowers with credit scores above 740.  When you compare that number during the 2001 to 2004 time period only 41 percent of loans backed by Fannie Mae had FICO scores above 740 and 43 percent of Freddie Mac-backed loans were above 740.

Last year about 75 percent of total loans purchased by Fannie Mae and Freddie Mac had credit scores of 740 or above. Freddie and Fannie don't make loans, they buy loans from lenders who make loans. So you can see from this number the majority, 75 percent, of loans these days are made to borrowers who have a credit score of 740 or above.

Homeowners defaulting on loans which peaked in 2007  at 3.0 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans. Back in 2002 and 2003 the 12 month default rate averaged 0.4 percent of mortgages, a normal percentage. Since 2009 the Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent, higher than the historical norm and surprisingly low since the unemployment rate has been very high the past couple of years.

Existing home sales under normal conditions, should be in the range of 5.0 to 5.5 million.  Lawrence Yun said “Sales this year are projected to rise 8 to 10 percent.  Although welcoming, this still represents a sub-par performance of about 4.6 million sales.

When lenders relax lending standards will probably depend on when the economy picks up steam and the unemployment rate moves lower. Mortgage rates and refinance rates can only go so low to help stimulate demand for housing, lenders have to start losing over stringent standards which would also help lower foreclosures and short sales because housing prices would rise further.
Author: Brian McKay
September 18th, 2012