In prepared comments, the Chairman of the Federal Reserve System, Ben Bernanke, addressed the challenges in housing and mortgage markets. Chairman Bernanke’s comments contained a clear message: tight lending standards that emerged after the housing boom are now holding back the housing market recovery and the economy as a whole.
“It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”
As part of these remarks, the Chairman noted the central role played by the housing sector within the overall economy. After reaching a low, many housing market indicators including starts, sales, and prices now indicate that the housing market is beginning to recover. However, the Chairman noted that “while it is encouraging that we are seeing signs of improvement in the housing market in most parts of the country….the housing sector is far from out of the woods”. He highlighted the mortgage market as a key component of housing still showing signs of strain. Addressing frictions in the mortgage market can consolidate gains made elsewhere in the housing sector.
Weakened mortgage demand partly accounts for declines in mortgage lending. The Chairman noted that “the reduction in mortgage originations and home purchases for all groups relative to the pre-crisis period partly reflects weakness in the effective demand for housing.” Analysis of the October Federal Reserve Board’s Senior Loan Officer Opinion Survey illustrate that demand for prime residential mortgages is growing, on net. However, the actual increase has been slight, implying that growth in sales of single-family residential homes may reflect the growing role played by all-cash sales.
The Chairman noted that “while the decline in the number of willing and qualified potential homebuyers explains some of the contraction in mortgage lending of the past few years…tight credit nevertheless remains an important factor as well.” Analysis of the most recent release of the Federal Reserve Board’s Senior Loan Officer Opinion Survey confirms this point. The October survey continues to illustrate that lending standards affecting the supply of prime residential mortgages remain basically unchanged at still tight levels while demand for prime residential mortgages is strengthening. On net, survey respondents indicated that obtaining a prime residential mortgage has become slightly easier over the past three months. In the October survey, 4.7% of respondents indicated that they had eased their lending standards, while 3.1% of banks reported having tightened them. However, this change was small and the vast majority of firms, 92.2% kept their lending standards basically the same. Although banks may be reluctant to finance residential home purchases, the likelihood that they will extend credit for other consumer loans is growing.
The Federal Open Market Committee, also chaired by Bernanke, has taken extraordinary steps to lower mortgages rates. In his speech, Chairman Bernanke further clarified that “the actions taken by the FOMC to put downward pressure on longer-term interest rates was meant to inspire greater confidence for individuals, families, businesses, and financial markets” and he reiterated the commitment of the Federal Reserve to “promoting a sustainable recovery within the context of price stability until the job market improves substantially.”