The stars seem to be aligning in the housing market. Home prices have been rising for many months, and the federal government is providing immense support to bolster the mortgage market. The big banks that make home loans are strong enough to provide credit to borrowers, as seen in the fourth-quarter results reported this week by major banks.
Yet despite the confluence of promising signs, little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market. Even as the housing market improves, new home loans are still scarce as interest rates have started to creep up — a situation that was starkly underlined in the banks’ results this week. The nation’s biggest mortgage lender, Wells Fargo, extended $50 billion in mortgages in fourth quarter, down 60 percent from a year ago.
The nation’s largest bank, JPMorgan, for its part, extended $23 billion in mortgages, down 55 percent from a year ago. Bank of America’s mortgage originations were down 46 percent. The declines reflected the waning of the refinancing boom prompted by record low interest rates. Without substantial income from refinancing, the banks’ mortgage businesses will now depend on making fresh loans to purchase houses, a business that, despite some revival, remains tepid.
“It’s a very small market,” JPMorgan’s chief financial officer, Marianne Lake, said in a conference call Tuesday. “One we haven’t seen the likes of since the year 2000.”
Much is riding on the appetite of large banks to make mortgages, both for the broader economic recovery and for Americans looking to own a home — long considered a way of obtaining a firm financial foothold.
The results this week, though, reflect a deep timidity that persists among the banks, which have focused their lending almost exclusively on borrowers with pristine credit. That trepidation is driven by a mixture of factors. Battered by losses on subprime loans, the banks are wary of taking on risk and are skittish about exposing themselves to litigation related to any questionable mortgages.
Since the 2008 financial crisis sent housing values plummeting, the banks’ mortgage business has largely hinged on government largess rather than the origination of new home loans. When the Federal Reserve, for example, reduced interest rates in recent years, the cuts prompted millions of homeowners to refinance their loans and reduce their monthly payments.
Some bank executives strike a cautiously optimistic tone, arguing that banks will have to make more loans to purchase houses to replace the refinancing frenzy.
But first, some bankers say, they have to navigate new mortgage rules that were set up in the aftermath of the crisis to promote safer loans. To spur lending, the government entities that backstop the most mortgages may also have to expand the range of mortgages they guarantee.
Until then, a significant number of borrowers with less-than-perfect credit scores remain largely shut out of the market.
“The people being left out right now are those whose credit scores are average,” said Julia Gordon, a director at the Center for American Progress. “It’s just your typical American family with a credit score in the high 600s or low 700s.” (A credit score lower than 620 is generally considered subprime.)
Still, some mortgage experts say they see signs of a thaw in the mortgage market that might loosen the loan spigot a bit. A potential catalyst, they say, is the appointment of Melvin Watt as the director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, the entities that guarantee most of the country’s mortgages.
Watt, according to some mortgage analysts, may decide to approve small but important changes that result in Fannie and Freddie’s guaranteeing a wider swath of mortgages. Gordon, for instance, suggested that Fannie and Freddie could backstop more loans in rural areas and guarantee a larger number of smaller loans. “We are not talking about subprime lending or lowering existing standards,” she said.
Right now, some bankers sound receptive toward Watt. “I believe he has the same interests that we all do, and that is to make home lending available to creditworthy Americans,” John Stumpf, the chief executive of Wells Fargo, said Tuesday. “We are willing to work with him to make that happen.”