Mortgage Loans Hit 16-Year Low as Standards Tighten

Mortgage lending declined to its lowest level in 16 years in 2011 amid weak demand for mortgages and tighter lending standards, according to a report released by federal regulators Tuesday.

Banks funded about 7.1 million mortgages in 2011, down 10% from the year before, and the lowest tally since banks issued 6.2 million mortgages in 1995. The Federal Reserve analyzed data submitted by more than 7,600 lenders under the Home Mortgage Disclosure Act.

Loans funding home purchases fell by 5% last year and stood 64% below the level of 2006, when the housing market reached its peak. Refinances, which are more sensitive to modest swings in interest rates, fell by 13% in 2011 from 2010 but rebounded at the end of the year, after the average 30-year fixed-rate mortgage dropped below 4%.

The report showed that home-purchase lending activity fell more substantially in areas that have borne the brunt of foreclosures and home-price declines, a sign of how difficult it will be for some markets to heal.

Overall, purchase loans for owner-occupied homes dropped by 7.2%. But neighborhoods considered hardest hit by the housing bust saw purchase loans fall 13.8%. Areas considered less affected by the bust saw loans drop by just 3.3%.

The report covers only loans made in 2011. Housing demand has improved this year, largely because investors and other buyers who have been paying in cash have scooped up quantities of foreclosed and other distressed properties. While lending to non-owner-occupants is down sharply from five years ago, it rebounded last year, rising 10% from 2010.

Banks have become much more cautious about making loans since the housing bust. The median credit score for approved loans has increased by about 40 points since 2006. Median credit scores “now exceed by a considerable margin” those for any time in the past 12 years, the report said. The bottom tenth of all home-purchase borrowers had seen an even larger increase of around 50 points.

Tighter credit standards could impede the latest push by the Federal Reserve to stimulate the economy. The Fed last week announced it would begin buying $40 billion in mortgage-backed securities partly in a bid to reduce yields, which could be passed onto borrowers in the form of lower mortgage rates.

Due to more conservative credit standards, “the impact of lower mortgage rates on housing is probably less powerful than normal,” said William Dudley, president of the Federal Reserve Bank of New York, in a speech on Tuesday in Florham Park, N.J. While rising home prices could ease that constraint over time, he said, “the difficulties of households with lower credit scores in obtaining mortgage credit warrants ongoing attention.”

The top 10 largest lenders in 2011, which accounted for around one-third of all mortgage originations, saw their home-purchase lending fall by 17%, compared with declines of just 2.6% for all other financial institutions. Credit unions saw an 8% increase in home-purchase lending, while thrifts saw lending fall by nearly one-fourth.

Loan denial rates were flat last year, with around 23% of all borrowers who applied for a mortgage being turned down. The Fed said in the report that issues related to home appraisals and the applicant’s debt-to-income ratio were two reasons for denials that had seen the largest increase since 2006.

As in prior years, denial rates were higher for minority borrower applicants. The denial rates for conventional home-purchase loans were 15% for Asians and 12% for non-Hispanic whites, while the denial rates for African-Americans and Hispanics stood at 31% and 22%, respectively.