With home costs rising across the country, mortgage lenders are making it easier to qualify for a real estate loan. However, it remains to be seen whether liberalizing lending rules can sustain the recovery, or whether it will create more problems that it tries to solve.
Faced with declining business, national mortgage lenders are easing credit standards to keep the housing market moving. Although the changes bring lending nowhere near the ultra-loose credit environment that sparked the subprime mortgage crisis, some argue they are a slippery slope that could lead to greater risks.
Simply put, home prices are rising across the country as the supply of available property continues to decline. According to the National Association of Realtors (NAR), home values rose 6.2% in the second quarter, eclipsing last year’s high. At the same time, sales activity levelled off as supply constraints kept potential buyers on the sidelines.
The national median price for a pre-owned single-family home was $255,600 in the second quarter, a new all-time high and well above the previous peak of $241,300. Single-family home prices rose in 87% of measured markets, with 154 out of 178 metropolitan areas registering price gains compared to last year.
Although lenders realize that demand is rising, they’ve also seen a decline in originations. GoRion reported back in July that a growing share of lenders have relaxed credit standards over the past three months to remain competitive. The share of lenders expecting easing for GSE-eligible and government loans is also rising.
Fannie Mae and Freddie Mac – the government-controlled companies that purchase mortgages from lenders to keep the market on even keel – are rolling out new programs to encourage homeownership. Earlier this year, the GSEs flagged affordability challenges as the biggest barrier to housing growth. In response, the GSEs are now allowing borrowers to have higher debt levels and still qualify for a mortgage. This includes raising the debt-to-income ratio limit to 50% of pre-tax income from 45% previously.
Analysts say any changes made by the government-sponsored enterprises will have a significant impact on underwriting standards.
The nation’s three major credit agencies – Equifax, TransUnion and Experian – are also dropping tax liens and civil judgments from some consumers’ credit profiles. This will enable more Americans to qualify for a home loan, although possibly at the expense of higher risk in the mortgage market. Roughly 7% of the 220 million Americans with a credit profile have liens or civil judgments against them, according to a study by Fair Isaac Corp.
Consumers are clearly benefiting from the labor market recovery, which has added 2.2 million jobs over the past year. However, stubbornly low wage growth and higher costs of living in major metropolitan regions are closing many doors to homeownership. For example, the percentage of Californians who can afford to buy a home has plunged to just over 30% in 2017 from nearly 60% in 2012.
Mortgage rates, though historically low, have risen since the November presidential election. Costs are expected to rise as the Federal Reserve gradually removes policy accommodation – a process that impacts mortgages indirectly. The 30-year fixed-rate mortgage averaged 3.89% in the week ended August 17, according to Freddie Mac’s latest survey.
 National Association of Realtors (August 16, 2017). “Home Prices Jump 6.2 Percent in Second Quarter; Eclipsing 2016 High.”
 Diana Olick (July 5, 2017). “Two major lending changes mean it’s suddenly easier to get a mortgage.” CNBC.
 Andrew Khouri (August 4, 2017). “As prices rise, mortgage lenders are making it easier to buy a house.” Los Angeles Times.