While banks were right to be more selective in their lending practices after the financial crisis, access to credit for homebuyers may now be getting too tight for the economy’s good, Federal Reserve Chairman Ben Bernanke said in Atlanta Nov. 15.
Some tightening was needed to correct lax standards, “however, it seems likely at this point that the pendulum has swung too far in the other way and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival of housing and impeding the economic recovery,” Mr. Bernanke said during a speech at the Operation HOPE Financial Dignity Summit.
The U.S. central bank is now working toward policies that walk the line between encouraging “reasonable prudence” on lending while ensuring that qualified borrowers aren’t shut out of the system, he said.
The housing market is seeing signs of recovery, with average home prices across the country rising for each of the last nine months.
“The growing demand for homes has been underpinned by record numbers of affordability, the result of historically low mortgage rates and house prices that are 30 percent or more below their peak in many areas,” he said.
But the revival faces headwinds, including the fact that lenders have not rolled back the most stringent of restrictions they put in place after the crisis in 2007, making it more difficult for people the fringes of creditworthiness to get home loans, said Mr. Bernanke, a native of Augusta.
The share of home owners and borrowers with credit scores below 620 has fallen from 17 percent at the end of 2006 to about 5 percent recently, as lenders show less appetite for risk in the face of uncertainty about the economy and government policy.
“Importantly, however, restrictive mortgage lending conditions do not seem to be linked to any insufficiency of bank capital, or to a general unwillingness to lend,” Mr. Bernanke said. Thanks to record-low interest rates, Fed research suggests that many bankers are simply too preoccupied with loan refinancing to focus on new home loan originations.
Addressing Operation HOPE, a Los Angeles-based nonprofit focused on financial dignity across the United States, Mr. Bernanke added that the mortgage crisis has been worse for minorities and for the poor, with most of the gains in minority home ownership in the last 15 years having been wiped out by the crisis.
“Lower income and minority communities are often disproportionately affected by problems in the national economy, and the effects of the housing bust have followed that unfortunate pattern,” Mr. Bernanke said.
Operation HOPE put on the summit at the Georgia International Convention Center Nov. 15. The day before, the organization opened its HOPE Financial Dignity Center within the Martin Luther King, Sr., Community Resource Complex adjacent to Ebenezer Baptist Church.
Visit www.operationhope.org for more information.
