Are low interest rates holding back mortgage lending?

In a recent article in the New York Times Dealbook section, contributors Peter Eavis and Jessica Silver-Greenberg wrote that all is not well in the current mortgage market.

“Despite the confluence of promising signs, little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market,” they write.

Obviously, some tightening in the mortgage market was to be expected after the financial crisis, when most agree that mortgage standards were too lax. But the article states that the pendulum may have swung too far in the other direction, with families that have credit scores in the low 700s finding it difficult to obtain credit.

As Reuters contributor Felix Salmon pointed out in his column, “that’s a very long way from subprime, which is what you’re considered to be when your credit score is below 620.”

Salmon explains that one of the reason banks are so reluctant to lend has to do with lower expected returns. Though 30-year fixed rates ticked up slightly in the past several years, they are still below 5 percent, which is the lowest they have been in more than 45 years, according to the Federal Reserve.

“If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels,” Salmon adds.

This means that lenders have less room for error, and must use risk management software to determine who is a safe bet.

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