10/8/2014
Tightest Credit Market in 16 Years Rejects Bernanke’s Bid - Bloomberg
Tightest Credit Market in 16 Years Rejects Bernanke’s
Bid
By Prashant Gopal - Oct 8, 2014
James Bregenzer, a 31-year-old marketing strategist in Chicago, was rejected for a mortgage in May
after successfully financing two previous home purchases. The hitch this time: his monthly payment
would have been $100 more than the lender was willing to approve.
Bregenzer is in good company. Standards in the U.S. are so high and inflexible that former Federal
Reserve Chairman Ben S. Bernanke, now a Brookings Institute fellow-in-residence with a net worth of
at least $1.1 million, said at a conference last week that he couldn’t refinance his house in Washington.
Even some doctors struggle to get home loans if they’re self-employed.
“We asked if we could go over by $100 and were told that’s just not going to work,” said Bregenzer,
who bought his first home before getting married in 2008. “The process of buying a home used to be
stupid easy. Now, my wife and I were buying a home with two salaries, we make a heck of a lot more
than I used to, and I have to go into great and terrible detail to show documentation.”
Related:
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Lenders are continuing to tighten the credit vise on homebuyers after five straight years of economic
expansion, imposing the toughest standards since at least 1998, according to a new index by
CoreLogic (CLGX) Inc. In May, credit availability for all home loans was half of what it was in the late
1990s, when the housing market was making steady gains much like today, according to the Housing
Credit Index. Banks are less likely to overlook periodic shifts in income or brief credit lapses in
adopting rigid rules to avoid losses after the housing crash, leaving creditworthy Americans without
financing.
CoreLogic Index
“It is clear that credit is quite tight relative to normal,” said Mark Fleming, chief economist at Irvine,
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10/8/2014
Tightest Credit Market in 16 Years Rejects Bernanke’s Bid - Bloomberg
California-based CoreLogic. While banks shouldn’t revert to the loose credit standards of the housing
bubble, it’s possible for lenders to expand credit while still being prudent, as they did in the late 1990s,
he said.
Homeownership Reconsidered
The Corelogic gauge uses 1998 as a baseline and considers six characteristics, including the share of
borrowers with low credit scores, small down payments and high debt relative to income, along with
the number of mortgage brokers and adjustable-rate loans.
While federal programs for struggling homeowners have helped to boost refinancing, credit
availability for home purchases in May was about a third of what it was in 1998, according to the
index. The housing market 16 years ago was growing moderately much like it has this year: Prices rose
5.3 percent in 1998 from the year earlier, according to data from the National Association of Realtors.
Mortgage purchase applications last week fell 43 percent from October 1998, according to a Mortgage
Bankers Association index released today.
Bernanke’s Rejection
Professionals with established careers whose earnings fluctuate may no longer be considered good
credit risks and are having trouble getting conventional financing. This includes self-employed
professionals, doctors with their own practices and nurses who cannot show two years with an
employer because they’ve shifted jobs multiple times, said Michael Slavin, chief executive officer of
Privlo Inc., an online provider of real estate loans for borrowers with complex finances.
Slavin said some of the employees of the hedge funds and venture capital firms that finance his
company’s mortgages have told him they’ve been rejected by lenders.
“It’s very hard to justify or come up with appropriate documentation -- it’s not clear what
documentation needs to be for someone with variable income,” CoreLogic’s Fleming said. “That
happens at the low end of the income distribution and at the high end.”
Bernanke, who is no longer on the Fed payroll, has a net worth of $1.1 million to $2.3 million, and
income of $150,000 to $1.1 million from textbook royalties in 2013, according to disclosure forms he
filed this year as he was leaving the Fed.
Bregenzers’ Loan
“I recently tried to refinance my mortgage and I was unsuccessful in doing so,” the former Fed
chairman said in a speech in Chicago.
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10/8/2014
Tightest Credit Market in 16 Years Rejects Bernanke’s Bid - Bloomberg
He has a 30-year mortgage with a 4.25 percent interest rate, according to his financial disclosures and
other public records. He’s already refinanced twice since buying the Capitol Hill rowhouse in May
2004, land records show.
“It’s entirely possible” that lenders “may have gone a little bit too far on mortgage credit conditions,”
he told a conference of the National Investment Center for Seniors Housing and Care.
Bregenzer said he and his wife, Katie, who also works in marketing, were told by Shelter Mortgage
that it wouldn’t fund the loan they needed in May, about four months before their son, Andy, was
born. Greater Lakes Credit Union, a local lender in North Chicago, gave the couple a 30-year fixed
mortgage. The Bregenzers provided a down payment of $60,000 for the $470,000 four-bedroom
home, which they purchased in July.
Lower Rates
Their monthly payment is $3,100, including taxes and insurance, said Bregenzer, who owns a private
equity firm in addition to working full-time in marketing.
“Buying a home now is very difficult,” Bregenzer said. “The rules are very, very strict.”
Philip LaGiglia, director of mortgage services at Great Lakes Credit Union, said the nonprofit group’s
lower fees and rates let it keep payments down and distribute loans more widely.
“I’ve been in the mortgage lending industry for 23 years and in no time has it been more difficult than
right now,” LaGiglia said.
A spokesman for Milwaukee-based Shelter Mortgage declined to comment.
Easy Credit
During the housing bubble in early 2005, credit for buying homes was at its loosest, more than twice
as available as in 1998, according to the index.
Lenders raised standards after the 2008 housing collapse compelled the government to rescue Fannie
Mae and Freddie Mac and the companies forced banks to buy back bad loans from them with
underwriting errors. Lenders are getting penalized for “non-material minor foot faults,” said David
Stevens, president of the Mortgage Bankers Association and former head of the Federal Housing
Administration.
Today, about 10 percent of borrowers with purchase loans have a FICO credit score of 660 or below,
on a scale of 350 to 850, compared with about 20 percent in 2001, according to Taz George, an Urban
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Tightest Credit Market in 16 Years Rejects Bernanke’s Bid - Bloomberg
Institute researcher. While low down payment mortgages have become more common, borrowing now
requires more pristine credit, George said.
“What you have to do if you’re a lender today is to lend defensively,” Stevens said. “The sifter plucks
out anything that has a story to it that you might have to defend sometime in the future. It’s risk
avoidance in the extreme.”
Stagnant Wages
Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia, said the
main issue in the housing market is the income of borrowers, not the standards of lenders. He said the
subprime collapse in 2008 damaged the finances of borrowers and that incomes, particularly for lowwage workers, have been stagnant.
“If you loosen up credit standards, there isn’t sufficient income to restart the fire,” Sanders said.
“What you’d have to do is lower credit standards so much that it would be adverse to the economy if
we had another default crisis.”
Julian Castro, who became Secretary of the Department of Housing and Urban Development in July,
has said the FHA is working with lenders to ease credit by making it clearer when they’ll have to
absorb the costs of soured loans.
2014 Tightening
“Policymakers are cognizant that the pendulum has swung too far toward restricting credit availability
and there’s a concerted effort to expand the credit box in the weeks and months ahead,” said Isaac
Boltansky, an analyst at Compass Point Research & Trading LLC in Washington.
Lenders have further tightened the availability of mortgages for purchases 22 percent in the first five
months of this year, according to the index.
“In good times, everybody is optimistic and neglects the downside risk,” said Itzhak Ben-David,
finance professor at the Fisher College of Business at Ohio State University. “After a major shock,
people are too cautious. Nobody wants to have the risk of holding the hot potato.”
To contact the reporter on this story: Prashant Gopal in Boston at pgopal2@bloomberg.net
To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Vincent
Bielski at vbielski@bloomberg.net Vincent Bielski, Rob Urban
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