Capital Economics Looks at Loosening Mortgage Conditions

While mortgage credit conditions remain in a vise-like state, ""Capital Economics"":https://www.capitaleconomics.com/ says recent signs indicate a loosening market.

In a recent ""US Housing Market Update,"" the firm points to Federal Reserve's latest ""Senior Loan Officer Survey"":https://themreport.com/articles/credit-terms-for-mortgages-esat-in-2q-as-demand-increases-2013-05-06 (SLOS), which showed a net balance of 8 percent of banks loosening mortgage credit conditions in the three months to April. While that may seem a small share, Capital Economics notes conditions have now either loosened or held constant in eight of the past nine quarters.

In addition, a net balance of 27 percent of banks intend to increase their residential mortgage assets over the next year--a sign that they may be willing to loosen the purse strings.

Also promising is the fact that an increasing share of applications is being approved. Data from ""Ellie Mae"":https://themreport.com/articles/purchase-share-climbs-credit-conditions-ease-in-march-2013-04-17 shows 60 percent of home purchase applications in March were approved--down a bit from February but up from 55 percent a year earlier.

Still, though, conditions are very tight, as evidenced by a special set of questions in the latest SLOS, which revealed banks are reluctant to make loans to borrowers with ""anything less than healthy credit ratings."" Many lenders are also looking for a 20 percent deposit as well, which would certainly keep many borrowers out.

Put-back risk from Fannie Mae and Freddie Mac is the most important factor constraining lending, followed by the profitability of lending and borrowers' difficulty obtaining insurance.

""In this respect, the increase in mortgage delinquencies reported by the MBA [Mortgage Bankers Association] in Q1 is bad news as it will exacerbate all three of these problems,"" the firm said. ""But these constraints should fade as the labour market recovery continues, helping mortgage credit conditions to loosen further.""