U.S. Home Loans Rose in Volume Despite Reports of Tight Mortgage Processing

Published by nora | Filed under Buyer / Seller Tips, Market Trends, Mortgage / Finance, Real Estate

Amid complaints that banks have become overly strict in processing home loans, a balance sheet document from the U.S. Federal Reserve showed that home mortgages increased over the five-year period from 2006 to 2010.

In the last quarter of 2010, a total of $10.06 trillion were lent by financial institutions for residential mortgages, an increase of nearly two percent from $9.87 trillion home loans provided to borrowers in 2066.

Another proof that home mortgages continue to be processed in large volumes is the increase in the loan-to-value (LTV) ratio. LTV is among the key measures used by mortgage lenders in evaluating a home loan application. Over the years, many mortgage lenders require their borrowers to have an 80 percent LTV or higher, asking them to make at least a 20-percent down payment. They only relent if the borrowers use government guarantees, such as FHA or VA guarantees, or third-party backing.

In 2006, the national LTV ratio for residential mortgages was 43.48 percent. This increased to 61.51 percent in 2010, another indication that mortgage banks continued to provide home loans as the ratio showed more mortgage debt and lesser equity. At first glance, the ratio showed that mortgage lenders took more risk, a contrast to the common view that they’ve learned from their huge loan losses and have reduced their loan risks. A deeper examination, however, revealed that banks have returned to the kind of loan underwriting that follow lending standards.

Mortgage banks are no longer approving home loans with inadequate documentation – a practice that allowed a huge number of financially ineligible borrowers to buy homes during the housing bubble. Every document now has to be verified and the capacity of a borrower to pay a loan must be proven through these verified documents. The popular exotic loans of about five or more years ago are no longer offered. Interest-only adjustable mortgage rate (ARM) loans are only offered to people with known resources to back the loans and whose ARM loans are just a part of their overall financial strategy.

Among the key reasons people continue to buy homes despite a discouraging housing market are the huge home price discounts. Investors who can afford to wait for several years before they can cash out see great profit potentials from homes priced below their construction values.