Overly tight lending standards at some banks may be holding back the U.S. economy by preventing creditworthy borrowers from buying homes, said Federal Reserve Chairman Ben Bernanke on Thursday.
Banks’ lax mortgage lending practices were blamed for the 2008 financial crisis, but now Bernanke contends that the “pendulum has swung too far the other way,” with banks now preventing qualified borrowers from getting loans.
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In a speech to the Operation HOPE Global Financial Dignity Summit in Atlanta, a non-profit organization that provides free economic education and financial counseling to lower- and middle-income Americans, Bernanke pointed out that mortgage rates remain near record lows, but many have been unable to take advantage of the low rates because banks now require higher credit scores, stricter income documentation, and larger down-payments before approving loans.
Through its bond purchases, the Fed has tried to make home-buying more affordable. On Thursday, mortgage buyer Freddie Mac said the average rate on the 30-year fixed mortgage fell to a record low of 3.34 percent. And minutes from the Fed’s October meeting, released on Wednesday, indicated that the Fed may pursue more bond purchases in the month ahead.
But lower rates won’t act as the economic stimulus the Fed had hoped for if strict bank rules prevent Americans from taking advantage of them.
While housing has shown signs of recover this year, construction activity, sales, and prices remain much lower than pre-crisis levels, Bernanke said. The housing market remains one of the weakest points of the economy — roughly 20 percent of mortgage borrowers remain underwater, which means they owe more on their mortgages than their homes are worth.
Bernanke assured that the Fed understood the problems still facing the U.S. economy, and that the Fed and other regulators would continue with efforts to make credit more available to potential home buyers, but in his speech, gave no hint of what future moves the central bank might take.