Continued increases in homebuyer activity and new construction are helping to boost the housing market recovery. Home prices have increased as much as 13% during the last year which has helped lift 4 million homeowners out of negative equity.
Even though the housing market was a major cause of the recent recession, stronger investment in this sector has boosted economic growth over the last few years. Although this is encouraging news, the recession has left some unwanted legacies. Some families are finding it extremely hard to gain credit needed to purchase a home, and this is holding back economic activity. Nowadays a buyer needs a significantly higher credit score to get a guaranteed loan than in the past, and an article in CNN Money.com points out the score is higher than expected given the economic fundamentals.
The result is that many responsible borrowers with credit histories that would have enabled them to gain a mortgage under normal circumstances are currently unable to find lenders willing to provide a loan at a reasonable rate. It’s been estimated by Moody’s that if today’s acceptable credit score was reverted to more traditional levels accepted prior to the housing crisis, then the number of potential mortgage borrowers could increase by more than 12.5 million households.
Just recently the Federal Housing Administration took steps to ensure more credit worthy and responsible families will be able to obtain a loan once they’re ready to buy a house, while still ensuring there is no return to unsound lending practices. This does beg the question as to why responsible borrowers with reasonable credit histories that should be eligible for loans, especially in a strengthening economy, haven’t already been able to gain financing. One reason was the lack of clarity as to the exact set of circumstances where the FHA will obligate lenders to the purchase mortgages, leaving them liable for losses. This led mortgage lenders to be extremely cautious over advancing loans to anyone with less than perfect credit scores.
The recent actions of the FHA has given assurance to lenders that mortgages meeting their credit guidelines can be provided without any fear of penalties, and have made it clearer as to the exact circumstances under which lenders would have to repurchase Fannie Mae and Freddie Mac guaranteed loans that have defaulted. It looks as if this move may already be paying off as certain large lenders have already reduced acceptable credit scores for government guaranteed loans.