How tight credit is strangling home sales

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Negative equity, lack of consumer confidence, frozen foreclosures and a shaky economy all have received their share of blame for the dearth of sellers and buyers that keeps the housing recovery in low gear and vulnerable.

No factor, however, has been as devastating to the housing economy and as difficult to improve as the inability of buyers, especially credit worthy buyers, to get financing.

In the ten weeks that have passed since Fed Chairman Ben Bernanke told bankers that strict lending standards are preventing many creditworthy borrowers, by some measures, consumers are actually having a more difficult time getting loans today than they were then.

Risk of default is declining as the pool of mortgages written after tighter standards were imposed in 2007 grows. In the past two years, delinquent payments by homeowners have declined markedly.

The latest US Credit Trends report from Equifax shows that that 30-day delinquency rates on first mortgages are down 13.5 percent from a year ago. The May 2012 total of $450 billion in delinquent balances represents a 37 percent decline from the peak of more than $700 billion in January 2010.

Yet mortgage lenders are not responding by making credit more available. Mortgages account for only about 5 percent of the 30 percent improvement in overall credit.

Even though mortgage rates are again at record lows and home prices are bottoming in markets across the nation, only 46 percent of consumers applying for a mortgage to buy a home are successful, according to Ellie Mae, whose mortgage management software handles approximately two million loan applications, or 20 percent of all U.S. mortgages.

But that’s an improvement over 39 percent in March. Median FICO scores for approved conventional purchase loans are virtually unchanged over the past year, at 762-764. Mortgages to purchase homes are actually taking three days longer, 46 days, to approve than they were a year ago.

Today’s tighter standards are making it tough on move up buyers, who are also sellers, who get behind on their mortgages as well as first-time buyers. Currently, some 3.6 million homeowners today are 30 days or more delinquent on their loans.

At the end of 2011, about 6.8 million homeownes were delinquent, according to LPS. As noted, delinquency rates are falling and a sizeable percentage of those who became delinquent will resume timely monthly payments rather than end up losing their homes.

But the ten to twenty million homeowners who have allowed themselves to become delinquent may find it impossible to qualify for a mortgage should they choose to take advantage of today’s affordable prices and rates.

Add the 10 million plus homeowners who have been recently delinquent to the number of homeowners who have fallen underwater on their mortgages — owing more than their homes are worth - now at 11.1 million.

Large numbers of these 21 or more million homeowners are potential sellers who could ease the demand for middle and lower tier inventory and could increase demand for move up homes.

Together these two groups account for 40 percent of the nation’s 53 million homeowners with a mortgage and 27 percent of all homes.