This is important because residential mortgage lending terms tightened significantly during the crisis, and have not eased subsequently.12 Indeed, over 50 percent of all new loans – and 70 percent of new prime conforming loans – go to borrowers with FICO scores of 760 or above, compared with about 30 percent before the crisis. Borrowers with credit scores of 720 or less now make up less than 30 percent of new originations, although they represent 52 percent of the population with credit scores. Steps should be taken to improve households’ access to credit. Currently, lenders are discouraged from making new prime conforming loans due to excessively stringent put-back rules on these mortgages. Such rules give Fannie Mae and Freddie Mac broad scope to force the originator to repurchase at par loans that go delinquent if there are any errors in the mortgage loan paperwork – even if the error has no direct link to the delinquency. It is essential that lenders are accountable for the representations they make and are appropriately penalized for any misrepresentations. However, doing this via a blanket  10  “The National and Regional Economic Outlook,” October 24, 2011, and “Securing the Recovery” November 17, 2011. 11  Board of Governors of the Federal Reserve System. 2012. White Paper, “The U.S. Housing Market: Current Conditions and Policy Considerations,” January 4. 12  According to the Senior Loan Officer Opinion Survey.
However, if households believe that house prices could decline further, the expected capital loss adds to the financing cost of owning a home and prospective buyers will be reluctant to buy even if mortgage rates are low. That said, it should also be recognized that the factors that affect demand and home prices are not immutable. They depend, in part, on policy choices. Consider, for example, the fact that most home purchases are financed with long-term mortgage credit. This means that the demand for housing is highly sensitive to the availability and cost of that credit. Outcomes in housing are also affected by the legal and operational infrastructure of the mortgage market. This apparatus has been wholly inadequate for dealing with a systemic shock to housing and employment, and is amplifying bad outcomes. A flawed resolution regime – very different from the more efficient regime for resolving excess debt in private commercial property – exacerbates the risks of under-shooting. 6  In Las Vegas, for instance, the ratio of house prices to replacement costs is now 0.7, having peaked at about 2.0 during the boom. 7  The supply curve is fixed and vertical at the post-bubble stock of housing so the entire adjustment to changes in demand takes place via prices rather than quantities. BIS central bankers’ speeches  3  Conflicts of interest are embedded in mortgage securitization structures and between first and second lien-holders. There are challenges to how the industry records and transfers interests in these mortgages.