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Fed Gov. Duke: Housing Improving, but Credit Tight for Some Borrowers

Fed Gov DukeAmerica's housing market appears to be in a sustainable recovery, but there is still cause for concern, Federal Reserve Governor Elizabeth Duke said in a May 9 speech at the Housing Policy Executive Council in Washington, D.C.

There's considerable good news. House prices have risen across the country, as 90 percent of local markets have seen gains over the year ending in February. Meanwhile, housing starts and building permits issued have risen by 30 percent since the start of 2012, new and existing home sales have grown by double-digit rates, and real estate agents report more home shoppers, Duke pointed out.

Market still historically weak
Nonetheless, activity in the housing market remains weak by historical standards, Duke said. Existing home sales are at levels of the late 1990s, and single-family building permits and starts are about equal to those of the early 1990s. Further, the number of people applying for residential mortgages is roughly equal to numbers from the mid-1990s, according to the Mortgage Bankers Association index. The drop in originations—striking given the record low mortgage rates of recent years—has been most pronounced among borrowers with low credit scores, Duke noted.

Various forces limiting mortgage lending
"Part of the contraction in loan originations to households with lower credit scores may reflect weak demand among these potential homebuyers," said Duke. "Although we have little data on this point, it may be the case that such households suffered disproportionately from the sharp rise in unemployment during the recession and thus have not been in a financial position to purchase a home."

There is evidence that tight mortgage lending conditions may also be a factor in the contraction in originations. The path to easier credit conditions is unclear, in Duke's view. She noted that some forces constraining mortgage credit availability, such as concerns about economic conditions or house prices, are likely to unwind naturally.  

However, if lenders are unsure about the conditions under which they will be required to repurchase loans sold to the government-sponsored enterprises such as Fannie Mae and Freddie Mac, they may not lend to borrowers whose risk profiles indicate a higher likelihood of default. It could require policy changes to resolve such concerns about "putback risk" and about servicing costs, Duke said.

May 22, 2013


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