Yesterday former Federal Reserve Board chief Ben Bernanke drew a lot of you-gotta-be-kidding-me news coverage when he confessed, during a conference panel, that he was recently turned down for a mortgage refinancing.
His point: Maybe bank’s lending standards are a bit too tough these days. Despite very low interest rates and the accommodative Federal Reserve policy he engineered, it’s still not easy for many people to get a mortgage.
The New York Times has a reasonable-sounding theory for why Bernanke, a guy who definitely should be able to make his payments, might have run into trouble. He’s changed jobs recently, which the automated software banks increasingly rely on tends not to like. And these days banks, under close scrutiny from regulators, are less willing to bend when the computer models say no.
Nevermind former super-powered central bankers with million-dollar book deals. What’s it really like out there for everyday home owners and would-be buyers?
“For a lot of borrowers, rock-bottom interest rates are an attractive nuisance—they can’t get through all the hurdles to get them,” says Keith Gumbinger of HSH.com, which tracks data on mortgages. Access to the most affordable mortgages, says Gumbinger, currently starts at a relatively high credit score of 740. In the loosest environment, back when the bubble was blowing up, that number was 680.
According to the Mortgage Credit Availability Index, published by the Mortgage Bankers Association trade group, lending standards have been steadily easing over the past couple years. The index, which gets higher as loans become easier to get, stands at about 116, compared to 100 in 2012. But the MBA also says the index would have stood at above 800 had it been calculated back in 2006. So we are a long way from the old, easy standards.
Gumbinger says today’s standards should be seen in a longer historical perspective. Though they are much tighter than they were during the boom, they aren’t so different from standards seen in the 1980s and mid-1990s.
And people can get loans. The market for jumbo loans, which all but disappeared, is steadily coming back, says Gumbinger, as banks seek to add new loans to their own portfolios, and then cross sell other financial products to the affluent customers who qualify. Some required down-payments have fallen from above 20% to as low as 15%
And Gumbinger says people with a credit score as low as about 600 are often able to qualify for FHA loans.
Bernanke’s problems make for a funny anecdote, and speak to a frustration lots of would-be be borrowers are feeling. But things will likely continue to loosen up. Now that banks have largely gone through the low-hanging fruit of customers with impeccable credit, they’ll have to compete for a pool of somewhat-less-perfect borrowers. According to data from the mortgage software company Ellie Mae, the typical completed loan had a credit score of 727, compared to 742 in spring of last year.
Of course, the really big question is how much easier lending really ought to be. The easy credit of the 2000s created the housing disaster Bernanke spent his time at the top of the Fed racing to fix.