Federal Reserve Chairman Ben Bernanke said “overly tight” mortgage standards are “slowing the revival in housing and impeding the economic recovery,” in a Nov. 15 speech in Atlanta. Bernanke acknowledged the tightening of credit standards was appropriate following the lax lending conditions that led to the housing bubble.
“Mortgage loans that were poorly underwritten or inappropriate for the borrower’s circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy,” Bernanke said.
“However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”
Bernanke further explained that the Federal Reserve will continue to use policy tools to stimulate economic growth and housing recovery by keeping both long- and short-term interest rates at historic lows. He pointed out, however, that although economic recovery and regulatory policy will affect access to credit for all households, certain borrower demographics may be struggling with lack of credit disproportionately to others.
“Lower-income and minority communities are often disproportionately affected by problems in the national economy, and the effects of the housing bust have followed that unfortunate pattern,” Bernanke said. “Indeed, as a result of the crisis, most or all of the hard-won gains in home ownership made by low-income and minority communities in the past 15 years or so have been reversed.”
According to data from the Census Bureau, home ownership fell about 5 percentage points for African Americans between 2004 and 2012, but only fell 2 percentage points for other groups. Likewise, between 2007 and 2010, home ownership rates fell more for households with income less than $20,000 than any other group.
“As I mentioned, home loss through foreclosure, though down from its peaks, remains an important problem, with lower-income and minority homeowners often being the hardest hit, Bernanke said. “Concentrations of foreclosures have been shown to do serious damage to neighborhoods and communities, reducing tax bases and leading to increased vandalism and crime. Thus, the overall effect of the foreclosure wave, especially when concentrated in lower-income and minority areas, is broader than its effects on individual homeowners.”
Bernanke’s remarks were made to a conference sponsored by Operation Hope, an economic empowerment organization. Bernanke said the Fed is starting to notice long-awaited signs of a housing market rebound. Nationally, house prices have increased for the past nine consecutive months, and sales of both new and existing homes have risen.
Bernanke was certain, however, that the housing sector is far from recovered. Not only do construction activity, sales and prices remain lower than their pre-crisis levels, but about 20 percent of mortgage borrowers remain underwater on their loans. Although the number of homes in foreclosure has lessened in the past two years, it still remains above 2 million.
