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Tight mortgage lending policy a hurdle to fast recovery
November 18, 2012
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WASHINGTON: While banks were right to be more selective in their lending practices after the financial crisis, access to credit for homebuyers may now be getting too tight for the economy’s good, Federal Reserve Chairman Ben Bernanke said recently.

Some tightening was needed to correct lax standards, “however, it seems likely at this point that the pendulum has swung too far in the other way and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival of housing and impeding the economic recovery,” Bernanke said during a speech at the Operation HOPE Financial Dignity Summit.

The US central bank is now working toward policies that walk the line between encouraging “reasonable prudence” on lending while ensuring that qualified borrowers aren’t shut out of the system, he said. 

The housing market is seeing signs of recovery, with average home prices across the country rising for each of the last nine months.

“The growing demand for homes has been underpinned by record numbers of affordability, the result of historically low mortgage rates and house prices that are 30 per cent or more below their peak in many areas,” he said.

But the revival faces headwinds, including the fact that lenders have not rolled back the most stringent of restrictions they put in place after the crisis in 2007, making it more difficult for people the fringes of creditworthiness to get home loans, said Bernanke, a native of Augusta. 

The share of home owners and borrowers with credit scores below 620 has fallen from 17 per cent at the end of 2006 to about 5 per cent recently, as lenders show less appetite for risk in the face of uncertainty about the economy and government policy.

“Importantly, however, restrictive mortgage lending conditions do not seem to be linked to any insufficiency of bank capital, or to a general unwillingness to lend,” Bernanke said. Thanks to record-low interest rates, Fed research suggests that many bankers are simply too preoccupied with loan refinancing to focus on new home loan originations.


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