The New York Times has a long article in the January 15th Business Section on home buyer’s difficulties in finding a mortgage and the bank’s difficulties in earning a profit from offering mortgages. For home buyers the issues are qualifying for a mortgage and the prospect of higher interest rates as the Fed backs away from quantitative easing. Banks credit requirements are higher than in the boom years and almost as strict as in the worst moments of the financial crisis. The Times article notes that typical American families with reasonable credit are being left out of the mortgage market.
Until last May when the Fed first talked about tapering QE3, low interest rates attracted home owners looking to refinance their mortgages. These clients were a win-win for the banks: the bank placed a new mortgage, collected the fees and dealt with a borrower with a good track record. Meanwhile the borrowers reduced their monthly expenses without incurring new debts. This business is drying up. The chart shows the share of mortgages for refinancing is declining and overall refinancing activity is dropping. What’s left for the banks is financing for purchases. The level of activity is roughly flat; pending regulations from the new Consumer Finance Protection Bureau will mean tighter credit standards and more restrictive loan to value ratios. Mortgage financing will only expand if banks are willing to take more credit risk.
After enjoying a strong tailwind of low interest rates and rising home values, the housing recovery could find 2014 chillier than 2013.