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Mortgage Rates Rise as a Few Banks Report Loosening Lending Standards in Fed Survey

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Mortgage Rates Rise as a Few Banks Report Loosening Lending Standards in Fed SurveyMortgage rates have risen for the second consecutive week as a report released by the Federal Reserve shows a few lenders are loosening lending restrictions on home loans. Average 30 year conventional mortgage rates have moved up to 3.60 percent this week, a slight increase from last week's average 30 year mortgage rate of 3.55 percent.

Average mortgage rates are higher because long bond yields have moved higher over the past two weeks. In fact, this past Friday alone 10 year bond yields moved 9 basis points higher to just under 2.00 percent. This is highest point for 10 year bond yields since early March when rates moved above 2.00 percent. As a result of the increase in yields last week, we can expect mortgage interest rates to move up at least 10 basis points early next week.

During the housing boom, lenders relaxed lending standards to the point where it was ridiculous how easy it was to obtain a mortgage. Some lenders wrote loans that lent home buyers more than 100 percent of the value of the home while other lenders made "no doc" loans - where home buyers were not required to provide any documentation about their income.

After the housing bust, lenders became a lot more stringent on issuing home loans. More documentation was required and higher credit scores were needed to obtain a loan. During the bust there were very few lenders that were making jumbo loans because there were no investors willing to buy these loans.

The few lenders offering jumbo mortgages were quoting jumbo mortgage rates that were more than 2oo basis points, or 2 percent, higher than conforming mortgage rates. One of the criticisms holding back the housing market from making a full recovery was banks' keeping lending standards so tight.

Millions of potential home buyers were not able to get a loan due to lenders only lending to people who had excellent credit scores. According to The Federal Reserve Board's survey, "April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices," now that housing has turned the corner and home prices are moving up across the United States some lenders are easing lending standards.

The Fed survey showed banks' policies regarding lending to businesses eased over the past three months including those made on home loans. The main factor as to why lenders eased restrictions for applicants is increased competition. Only a few banks reported having eased standards on prime residential mortgages.

This will change in the coming months and years because the economy continues to improve. Consumer sentiment is high, the unemployment rate is dropping, and home prices are increasing. As things get better, more banks will become confident in the future and will ease lending standards. One thing we can count on is lending standards never easing to the point of the last housing boom, thanks to new lending laws put into place recently.

Author: Brian McKay
May 19th, 2013