Economist's Commentary: October 31, 2008
A Rare Commodity: Financing
By Ken Fears, Manager of Regional Economics 
A new problem lingers over the housing market. Credit standards and down payment requirements had already risen tremendously since early 2007. These days, however, only those with superior to exceptional credit and the ability to put down a substantial down payment can get financing at any rate! Now the issue is not of affordability or employment, but to whom banks will extend credit.
The increase in credit standards is not without merit. According to statistics from the American Bankers' Association, delinquencies on residential mortgages at large commercial banks have increased 97.0 percent over the four quarters ending in the second quarter of 2008. Smaller, commercial banks have faired better with an increase in delinquencies of 40.0 percent over this same period.
This alarming jump in delinquencies is a direct result of bad lending and the slow economy and lenders are acting as a result. According to the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices, 70.0 percent of respondents indicated that lending standards at their institution had tightened moderately, while 4.0 percent indicated that standards had tightened considerably, with the remainder citing no change. Of these same respondents, 50.1 percent noticed a moderate decrease in demand for new prime residential mortgages for purchase, while 24.5 percent saw no change, and 22.5 saw an increase in demand. It is clear that standards are being raised at precisely the same time that demand is tipping.
Standards are also on the rise for HELOC financing. As home prices decline, a home owner's home equity becomes less certain raising the risk to banks on HELOC loans. Of the respondents to the FED's survey, 58.8 percent of loan officers indicated that credit standards for approving applications for revolving home equity lines of credit had increased "somewhat", 21.6 percent cited a considerable increase, and just 19.6 percent noted no change. Clearly, home sales are not the only area being affected.
In this environment, Realtors® need to think of creative ways to help their buyers find financing options. Smaller commercial banks are experiencing fewer losses from the sub-prime crisis than large commercial banks because fewer of them were players in the complex mortgage-backed securities market. In addition, small local banks tend to hold the mortgages that they write. Consequently, they were not as lax with their lending standards in recent years and now possess healthier balance sheets as a result. The FED's survey shows that lending from banks "other" than large banks has also contracted, but the change has been moderately less severe.
Credit unions are also a great source of financing at this time. Managers in this industry maintained their conservative lending and investment patterns during the housing boom. Consequently, this industry currently shows healthy capital-to-asset ratios and a delinquency rate that rose only slightly in the last 12 months to 1.04 percent, less than a quarter of the rate at large commercial banks.
Of course, state, local, and Federal finance programs remain some of the best avenues for financing. The government realizes the importance of lending at this time and is doing everything to keep this process moving. Buyers' agents should familiarize themselves with these programs while sellers' agents need be aware of this trend and the must be open to working with government loans.
Just as affordability is improving, the market is being handed another problem. Access to credit and creative financing options will play a bigger role than ever in the fall of 2008 and spring of 2009. Buyers and sellers' agents would do well to explore these options, so that they may best counsel their clients.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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