The housing market may be improving but there’s still the issue of who ends up with the bad loans made during the boom years. Interest rates on mortgages continue to move lower—the average rate on a 30-year loan hit 3.53% last week—but lenders are wary of making new loans.
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Fannie Mae and Freddie Mac have been forcing banks to take back a slew of loans banks made during the housing boom that were sold to the two agencies. To protect against similar future risk, banks are stiffening credit and documentation standards for mortgage applications.
The action directly opposes the Fed’s efforts to keep mortgage rates low by buying mortgage-backed securities. Most of the loans involved in the take backs have already defaulted, saddling banks with the losses.
So standards have become more stringent than at any time since 1986, despite the fact that mortgage interest rates are at their lowest levels since the 1950s.
Borrowers now have to prove that every deposit into their account—even for as little as a few hundred dollars—is their money and not a loan from family or friends. Inspections of houses also carry more weight as banks want to ensure sure soundness of the property securing the loan.
Changes in the way mortgages are processed have also affected consumers’ ability to get loans.
During the boom years, Freddie Mac and Fannie Mae had automated underwriting systems that made it easier to obtain a loan.
Borrowers may have better chances of obtaining a mortgage
with local banks or credit unions because they do not sell loans to the agencies. But there are not enough of these entities to make up for the loans made by the big banks.
Until the bad loans are absorbed and credit becomes more available, the housing rebound may continue to experience some headwinds.