Over a quarter of mortgage applications made to top lenders in Illinois are denied, according to an analysis by The Wall Street Journal (“Tighter Lending Criteria Crimps Housing,” June 25). Illinois, at a 25.5% rejection rate, is below the national average of 26.8%. Some states, including Texas, Mississippi, and Vermont have denial rates of 35%.
Tight lending standards are a result of Fannie Mae and Freddie Mac, which together insure 90% of all mortgages, seeking to avoid further losses. Both organizations were taken over by the U.S. government after massive losses in the recent recession and are under political pressure to reverse their fortunes.
Among those who are most likely to be denied, according to the article, are those who are working but were unemployed for a period of time in the last few years and small business owners or contractors (including real estate agents) who have variable income. From the Journal article:
Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.
“As the noose on credit availability tightens, credit is being choked off at a time when the housing market is extremely fragile,” says Laurie Goodman, senior managing director at Amherst Securities Group LP.
Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles, counters that “banks are doing what they need to do” to change lending standards in the wake of a “crazy bubble. ”
He adds, “You had decades where credit standards were tougher than they are even now.”
An interactive map accompanies the article.