Capital Economics: Banks Increasing Value of Loans, Not Volume

By: Esther Cho 04/05/2012

Amid reports of lower unemployment rates, falling home prices, and less than 4 percent interest rates, owning a home seems to be more attractive than ever.

In fact, earlier this month, the National Association of Realtors reported that housing affordability conditions reached the highest level since 1970, which is when this data was first recorded.

Though, tight lending standards have become an obstacle in getting these lower-priced homes off the market even if it could help the housing market recover by clearing out foreclosures.

Recently, a Wall Street Journal blog discussed today’s lending climate and reported that loans closed by banks and mortgage lenders in February had borrowers with a credit score of 750, up from 740 six months earlier, and the average denied loan had a credit score of 699.

While having access to credit to finance a home remains a challenge, Capital Economics reported that signs do exist that show banks might be just a bit more willing to lend.

However, these “signs” aren’t necessarily surfacing from data on the volume of mortgage lending, which continues to fall.

The research firm said the value of mortgage lending has recently started to rise, and explained that this is happening specifically with commercial banks, which have started to lend more per borrower.

The average size of mortgage applications has increased by $20,000 since December to $235,000 in March, which suggests the appetite of would-be borrowers’ for credit is increasing, according to Capital Economics, all the while banks appear to be lending more to seemingly less risky borrowers.

The research firm said Fed data shows a rise in the value of commercial banks’ mortgage assets, which holds implications that lenders are approving these larger applications.

In addition, banks are financing more of the home purchase price at 80 percent or more in recent months, whereas in 2010, they financed less than 75 percent, Capital Economics stated.

As long as economic conditions continue to improve, the research firm said banks may eventually boost lending to borrowers with lower credit scores, too.

Source Esther Cho 04/05/2012