RTC Mortgage Blog

Does Tighter Underwriting Prevent Foreclosures? Or Cause them?

Ben Bernanke commented a couple of weeks ago that the underwriting criteria have gotten too tight. Although we already knew this, it was good to hear it from the Chairman of the Federal Reserve. He ought to know, right? And when he speaks, people listen so maybe this will be the beginning of a solution to the housing crisis.

Hearing his comments got me thinking. I hope you follow my logic on this...

The number of foreclosures is rising so the industry - primarily Fannie Mae and Freddie Mac - tighten underwriting guidelines. But foreclosures still rise even further and Fannie/Freddie tighten some more thinking that if foreclosures are still rising then underwriting guidelines must still be too lax.

In the meantime, we have people losing their jobs or making less money while their home equity is shrinking. Eventually they can't make their payments anymore and their equity is gone so they stop making payments - even if they can afford them. The borrowers and lenders try to arrange a short sale but the process is lengthy and the potential buyers can't get qualified. So the house doesn't sell and eventually becomes a bank-owned foreclosure sale. It goes on the market at a low price and competes with all the other short sales and foreclosures driving home prices down even further.

Now, we have too much supply of housing on the market due to foreclosures, short sales, unemployment, weak economy, declining property values, etc. Potential buyers are prevented from buying because they just can't qualify with the new, tighter underwriting standards.

And so we have a shrinking pool of potential buyers and a growing pool of properties that don't sell. Foreclosures rise and they tighten the guidelines further. And the housing crisis can't be solved.

I welcome your comments..

Mortgage Rate Update:

The Fed held rates steady at their regularly scheduled meeting this week and basically admitted that the economy is weakening. Unemployment is worse, the stock market declines and money flowed into bonds, including Mortgage-Backed Securities. What's bad for the economy is good for rates and so mortgage rates remain at record low rates. Conforming rates are just above 4% for a 30-year loan and 15 year loans are around 3.75%. Jumbo loan rates are lower too and there are more jumbo lenders in the arena.

Click here for a news article on the resurgence of Jumbo financing: http://www.cnbc.com/id/38674499