The housing market recovery has indeed been choppy. Though mortgage rates have been low, not many are able to take advantage of the scenario because lending standards are supremely high. Some analysts are blaming the financial institutions for holding back a full property market recovery.
In a recent feature on MarketWatch, Philip Van Doorn (columnist) wrote that the mortgage lending industry was undergoing "an upheaval" with more banks unwilling to lend to low-income borrowers.
The lenders are also hesitating about issuing Federal Housing Administration (FHA) loans, where the mortgages are insured by the agency.
Why you ask? Because banks don't want to face the risk of a gigantic loss once again.
During the 2007-08 housing market crash, several banks packed and sold mortgage loans some of which were faulty. When the customers could not pay their loan back, the FHA had to bear all the losses and that dragged it down into deep debts.
These banks were penalized for selling shoddy mortgages to the public and now, the banks are twice shy to lend to borrowers who do not have stellar credit scores. The banks have just become too cautious and are avoiding any loans that have the slightest risk of default.
Especially with the number of multi-million dollar lawsuits doing the rounds, the condition has worsened. Big players like JP Morgan Chase, Citigroup and Bank of America have had to shell out millions to settle lawsuits with the government in the recent past.
"Nothing housing officials do is likely to make a dent in standards hardened by multibillion-dollar lawsuits. Policy changes at the Federal Housing Finance Agency cannot control what prosecutors decide is culpable in the future," John Carney wrote for the Wall Street Journal.
"And no executive wants to risk having to explain to a Senate committee that their bank had two loan standards: one for its own portfolio and a different, looser standard for the government's. All of which means that tight mortgage lending is here to stay," he added.
But a survey by the U.S. Federal Reserve showed that more banks are trying to loosen lending standards now. About one in four banks said that they had loosened lending for borrowers that have good credit scores.
While the banks are trying to do their best in the current scenario, the real problem lies in the income.
A considerable share of the American population does not qualify for a mortgage because of low income and poor credit score. A recent report by the U.S. Federal Reserve showed that median household income for all, except the richest 10 percent in America, went down in the period 2010-13.
Experts suggest that loose lending standards can't do much for the economy. Conditions will improve only if the job market does.
