NAR's Economist Says Tighter Loan Underwriting 'Problematic'

Current market problems and reforms in the underwriting and pricing of subprime loans, including the tightening of underwriting standards by regulators, will have a short-term impact on housing markets. That will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities to lower-income homeowners and those living in high cost metropolitan areas, the National Association of REALTORS said this week.

NAR Senior Vice President and Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than three percent a year over the next two years. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a downpayment or growing their income.

"Foreclosures are increasing inventories in certain local markets. The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures," Lereah said.

"From a broader perspective, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy," said Lereah in a commentary distributed to NAR members recently.

"Many of these households will seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards and from other lenders offering fair and affordable mortgage options to subprime borrowers. Remember, many of these borrowers are low-income, minorities and first-time buyers - all important participants in the home buying marketplace."

Lereah warned against overreaction to the situation. "Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch," Lereah said.

In other news...

Pending sales of existing U.S. homes surprisingly rose in February even as bad weather and weakness in the subprime lending sector put a crimp on the housing market, according to a report released this week by the National Association of REALTORS. Pending sales were down 6.0% from a month earlier. The Pending Home Sales Index (PHSI), based on contracts signed in February, stood at 109.3 - down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Earlier, mild weather caused the index to spike at 113.3 in December.

Wall Street analysts polled ahead of the realtor report were expecting the index to come in at 108.2. Jon Basile, an economist with Credit Suisse of New York, said this week's data "gives a feel that existing home sales has stabilized because they are higher than the lows of last year. At the very least, housing demand is not getting any worse."

The PHSI in the South rose 4.5 percent in February to 121.9 but was 8.0 percent below a year ago. The index in the Midwest increased 2.9 percent from January to 103.0 but was 9.7 percent lower than February 2006. The index in the Northeast slipped 1.3 percent in February to 99.1 and was 8.2 percent below a year earlier. In the West, the index fell 6.0 percent from January to 104.1 and was 8.2 percent lower than February 2006.

~~ Real Trends