Month: November 2010

National Assn. of Realtors wants FICO credit scoring model revised

The group says Fair Isaac Corp. should lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of nondelinquent customers.

By Kenneth R. Harney, November 21, 2010

LA Times, Reporting from Washington

Here’s a homeowner credit torture scenario that might have happened to you, and now has a major real estate lobby on Capitol Hill demanding immediate reforms.

Say you’ve had a solid payment record on just about all your accounts — three credit cards, your first mortgage, home equity line and other important monthly bills. The last time you checked, your credit scores were comfortably in the 750s.

Suddenly you get a notice from the bank that because of “market conditions,” your equity line limit has been cut from $60,000 to $35,000, slightly above the $30,000 balance you’ve got outstanding. Then one of your credit card issuers hits you with more bad news: Your $20,000 limit has been reduced to $10,000. Your balance on the card, meanwhile, is about $9,000.

What happens to your credit scores in the wake of the bank cuts? You might assume that nothing happens; you haven’t been late, you haven’t missed a monthly payment. You’re a good customer.

Wrong. Depending upon your overall financial situation, your credit scores could plunge into the upper 600s. This in turn could put you out of reach for a refinancing at a favorable interest rate or hamper your ability to buy a new home and sell your current one.

The reason for the score drop: With the reductions in your line limits, you’re now much closer to being maxed out. You are using a higher percentage of your available credit — $30,000 of the $35,000 revised limit (86%) on your home equity line, and $9,000 of the $10,000 limit (90%) on your card. Credit scoring models typically penalize high utilization rates because they are statistically correlated with future delinquency problems.

No one ever warned you about this — certainly not the banks that cut your credit. Now the largest lobby group on Capitol Hill, the 1.1-million-member National Assn. of Realtors, is demanding that Fair Isaac Corp., the creator of the FICO score that dominates the mortgage market, take immediate steps to lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of nondelinquent customers.

In a major policy move, the realty association is calling upon Fair Isaac to “amend its formulas to avoid harming consumers whose utilization rates increase because their available lines of credit” are reduced despite on-time payment histories. The group wants FICO to either ignore the utilization rate altogether for such consumers or to compute the score as if the credit max had not been reduced.

Ron Phipps, president of the association, said, “We’re seeing this across the country and it is hurting people who are responsible users of credit.” Tom Salomone, broker-owner of Real Estate II in Coral Springs, Fla., said, “There’s absolutely no question these credit card and home equity line reductions are killing deals, and arbitrarily raising interest rates on people.”

In an interview, Salomone said he had seen many situations where home buyers lost 20 to 30 points on FICO scores “but had done nothing wrong — the banks just lowered their lines.” He added that the inability of FICO’s software to distinguish innocent victims from people whose behavior actually merits credit line reductions demonstrates that “FICO’s model is archaic.”

Asked for a response, Joanne Gaskin, Fair Isaac’s director of mortgage scoring solutions, said the FICO model attached such importance to consumers’ available credit and utilization rates — they account for 30% of the score — because they are highly accurate predictors of future credit problems.

Research conducted by Fair Isaac last year found that consumers who use 70% of their available credit “have a future bad rate 20 to 50 times greater than consumers with lower utilizations.” Ignoring this key indicator, the study said, would decrease the score’s “predictive power.”

The National Assn. of Realtors has also asked Fair Isaac to help out with the nationwide foreclosure crisis by revising its model to recognize lender codings on credit file accounts indicating that homeowners had received loan modifications approved under federally backed programs. Rather than treating borrowers’ reduced post-modification payments as ongoing evidence that the mortgage was “not paid as originally agreed,” which depresses scores sharply, the association said FICO scores should reflect the reality that the lender agreed to lower payments and borrowers are making payments “as agreed.”

The realty group also said it planned to push for legislation in the upcoming congressional session to provide free credit scores — one each from Equifax, Experian and TransUnion, the national credit bureaus — every time a consumer orders annual free credit reports. (You can obtain your free reports once a year — without scores — at http://www.annualcreditreport.com.)

 

Mortgage Delinquencies Decline

The Wall Street Journal
NOVEMBER 19, 2010
By NICK TIMIRAOS
Number Reflects Stronger Economy, But Stubborn Jobless Rate Likely to Keep Foreclosure Rate High.

The number of U.S. households behind on their mortgage payments declined during the third quarter, but the number of newly initiated foreclosures rose as banks continued to clear a backlog of delinquent loans.

Nearly 13.5% of home loans were 30 days or more past due or in foreclosure at the end of September, representing around seven million households, according to the Mortgage Bankers Association quarterly survey. That rate is down from 14.4% one year ago but still up from 10% two years ago.

The decline reflects an improving economy and is the latest sign that the worst of the mortgage crisis may be easing.

Still, the housing market still faces considerable stress as tepid job growth and an overhang of unsold homes puts pressure on prices. Falling prices will hamstring homeowners who need to sell their homes because they can’t make their payments.

Unless the economy improves faster, it’s unlikely that loan delinquencies will decline significantly “just given the headwinds from the job market” and a large oversupply of homes, said Michael Fratantoni, the MBA’s vice president for research and economics. “We still have a long way to go.”

The number of loans considered seriously delinquent— meaning the borrower has missed at least three consecutive payments or is in foreclosure—dropped to 8.7%, the lowest level since the second quarter of 2009.

Meanwhile, the rate of newly-initiated foreclosures climbed to 1.34% in the third quarter from 1.11% during the previous quarter, driven heavily by foreclosures on prime fixed-rate loans, which increased to the highest level since the MBA began tracking that data in 1998.

The improvement in mortgage performance is “largely illusory” because much of it has resulted from loan modifications, which generally have a high rate of re-default, said Laurie Goodman, senior managing director at mortgage-bond trader Amherst Securities Group LP in New York.

Separately, data released by the Treasury Department on Thursday showed that the number of homeowners receiving help under the Obama administration’s Home Affordable Modification Program declined for the first time since the program began.

More homeowners in “trial” reduced-payment plans were ruled ineligible for a permanent modification, or simply missed their payments.

The bankers association data don’t yet show the impact of foreclosures suspensions by several banks in certain states, which began in late September amid reports that foreclosure documents weren’t being properly filed. Mr. Fratantoni said the delays were likely to inflate the share of homes in the foreclosure process in the fourth quarter and through the first half of next year.

The states with the highest rate of seriously delinquent loans at the end of September were Florida (19.5%), Nevada (17.8%), Illinois (10.8%), Arizona (10.8%), and New Jersey (10.7%).

Florida, Arizona, Nevada and California have faced the most severe home-price declines and have the highest rate of loans that are 90 days or more past due.

But foreclosure inventory remains particularly high in states such as Florida, New Jersey and Illinois where banks must take back homes by going to court.

California, where judges don’t have to approve foreclosures, has the second-highest rate of loans that are at least 90 days overdue, but it has only the 11th largest inventory of foreclosures. “There’s a public policy success story to be told in California in terms of the speed with which they’ve been able to dispatch foreclosures,” said Stan Humphries, chief economist at Zillow.com, a real-estate website.

Loan defaults began rising more than four years ago after easy lending practices and a variety of exotic mortgage products allowed millions of people to buy homes they couldn’t ultimately afford. Initially, the mortgage crisis was confined to subprime mortgages, many of which were adjustable-rate mortgages that reset to higher levels that borrowers couldn’t afford.

Since 2008, the mortgage problem has spread to prime mortgages as high unemployment and sharp declines in home prices hurt the broader group of borrowers. At the end of the third quarter, more than 11 million borrowers live in homes that are worth less than what they owe on the mortgage.

The MBA survey showed that prime fixed-rate loans and FHA-backed loans accounted for a majority of foreclosure starts for the first time since the crisis began, at 53%, up from 39% in the second quarter. Those mortgages can be harder to successfully modify without reducing loan balances, a step that banks and investors have been reluctant to take.

More homeowners who fall behind on their mortgages are staying in their homes longer as banks struggle to administer modifications. Among borrowers who were 90 days or more delinquent in September, one-third hadn’t made any payments in more than one year, up from 18% one year earlier, according to LPS Applied Analytics.

Southern California Home Sales Drop Again, Median Price Edges Up

DQNews.com October 19, 2010

La Jolla, CA—Southland home sales dropped for the third month in a row amid renewed doubts about a market that is recovering in fits and starts. The median price moved up on a year-over-year basis for the tenth month in a row and has regained about one-fifth of its peak-to-trough loss. The effects on the market of the latest chapter in the foreclosure crisis are unclear, a real estate information service reported.

A total of 18,091 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 2.4 percent from 18,541 in August, and down 16.0 percent from 21,539 for September 2009, according to MDA DataQuick of San Diego.

This was the slowest September since 2007, when 12,455 homes were sold. Last month’s sales were 26.3 percent lower than the September average of 24,578. DataQuick’s statistics begin in 1988. An August-to-September drop is normal for the season: On average, sales have dipped 9.2 percent between those two months.

“Today’s market can be characterized as much by activity that’s not happening, as by the activity that is happening. We’re seeing distress-selling, bargain-hunting and entry-level buying, while the rest of the market is still largely on hold,” said John Walsh, MDA DataQuick president.

“As many wait for this market uncertainty and turbulence to pass, demand is being generated and is accumulating. At some point, the mortgage spigot will be re-opened and there will be a surge of buying activity, probably financed with low interest rates,” he said.

The median price paid for a Southland home was $295,500 last month. That was up 2.6 percent from $288,000 in August, and up 7.5 percent from $275,000 for September 2009. The low point of the current cycle was $247,000 in April 2009, while the high point was $505,000 in mid 2007. The median’s peak-to-trough drop was due to a decline in home values as well as a shift in sales toward low-cost homes, especially foreclosures.

Foreclosure resales accounted for 33.4 percent of the resale market last month, down from 34.5 percent in August and down from 40.4 percent a year ago. The all-time high was February 2009 at 56.7 percent, DataQuick reported.

Government-insured FHA loans, a popular choice among first-time buyers, accounted for 36.4 percent of all mortgages used to purchase homes in September, down from 37.3 percent in August and 38.9 percent a year ago.

Last month 21.2 percent of all sales were for $500,000 or more, the same as August and up from 20.0 percent a year ago. The low point for $500,000-plus sales was in February last year, when 13.6 percent of sales crossed that threshold. Over the past decade, a monthly average of 25.4 percent of homes sold for $500,000 or more.

Viewed a different way, Southland zip codes in the top one-third of the housing market, based on historical prices, accounted for 31.0 percent of existing single-family house sales last month, up from 30.0 percent in August and 28.4 percent a year ago. Over the last decade those higher-end areas have contributed a monthly average of 33.3 percent of regional sales. Their contribution to overall sales hit a low of 21.0 percent in January 2009.

High-end sales would be stronger if adjustable-rate mortgages (ARMs) and “jumbo” loans were easier to obtain. Both have become much more difficult to get since the credit crunch hit three years ago.

While about 44 percent of all Southland purchase mortgages since 2000 have been ARMs, the figure was 5.5 percent last month, up from 5.4 percent in August and up from 4.0 percent in September last year.

Jumbo loans, mortgages above the old conforming limit of $417,000, accounted for 18.1 percent of last month’s purchase lending, the same as the month before and up from 15.2 percent in September 2009. Before the August 2007 credit crisis, jumbos accounted for 40 percent of the market.

Absentee buyers – mostly investors and some second-home purchasers – bought 21.0 percent of the homes sold in September, paying a median of $205,000. Buyers who appeared to have paid all cash – meaning there was no indication that a corresponding purchase loan was recorded – accounted for 25.3 percent of September sales, paying a median $200,000. In February this year, cash sales peaked at 30.1 percent. The 22-year monthly average for Southland homes purchased with cash is 14.2 percent.

The “flipping” of homes has trended higher over the past year. Last month the percentage of Southland homes bought and re-sold within a six-month period was 3.7 percent, up from 3.5 percent in August and 2.6 percent a year earlier. Last month’s flipping rate varied from as little as 2.9 percent in Riverside County to as much as 4.2 percent in Orange County.

MDA DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.

The typical monthly mortgage payment that Southland buyers committed themselves to paying was $1,177 last month, up from $1,158 for August, and down from $1,189 September a year ago. Adjusted for inflation, current payments are 47.5 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They were 57.0 percent below the current cycle’s peak in July 2007.

Indicators of market distress continue to move in different directions. Foreclosure activity remains high by historical standards but is lower than peak levels reached over the last two years. Financing with multiple mortgages is very low and down payment sizes are stable, MDA DataQuick reported.

 

Sales Volume Median Price
All homes Sep-09 Sep-10 %Chng Sep-09 Sep-10 %Chng
Los Angeles 7,138 6,070 -15.0% $330,000 $340,000 3.00%
Orange 2,828 2,524 -10.7% $429,000 $445,000 3.70%
Riverside 4,312 3,292 -23.7% $185,000 $200,000 8.10%
San Bernardino 3,023 2,454 -18.8% $150,000 $160,000 6.70%
San Diego 3,454 3,069 -11.1% $325,000 $330,500 1.70%
Ventura 784 682 -13.0% $371,750 $370,000 -0.50%
SoCal 21,539 18,091 -16.0% $275,000 $295,500 7.50%

 

Investors raise pressure on mortgage lenders

Banks face mounting claims over losses tied to ‘faulty’ loans

By John W. Schoen Senior producer
msnbc.com 11/9/2010
Since the housing bubble burst more than three years ago, lenders have been fending off legal challenges from homeowners who say they were duped by bad mortgages. Now the industry faces a potentially more formidable adversary: investors who bought bonds backed by those bad loans.

Citibank became the latest lender to disclose that it faces legal challenges from investors demanding a refund on billions of dollars lost on bonds backed by faulty loans. On Friday, Citibank disclosed in a regulatory filling that Charles Schwab, the Federal Home Loan Banks of Chicago and Indianapolis and a hedge fund have filed lawsuits claiming the bank misled them when it sold bonds backed by pools of home mortgages.

The key issue: Who will take the losses for billions of dollars worth of failing mortgages written during the height of the housing boom?

Investors are pursuing several strategies, but they generally center on a promise made in the documents that created bonds backed by mortgages. These so-called “representations and warranties” assured investors that certain underwriting standards would be followed.

Yet underwriting was often lax during the boom years, with lapses including inflated appraisals,  overstated incomes and false assurances that a borrower would live in the house he was buying.

“If you tell my bondholders that this is an owner-occupied property and it’s not owner-occupied, that’s an incorrect fact,” said Kathy Patrick, a Houston-based attorney representing investors who want Bank of America to buy back bad mortgages. “And an owner of occupied property has very different credit qualities than an investment property where somebody has 20 properties and may default strategically.”

Patrick is representing a high-powered investor group that includes Freddie Mac, Pimco Investment Management, Blackrock Financial Management and the Federal Reserve Bank of New York, which took over mortgage-backed investments held by American International Group.

Lenders have vowed to put up a vigorous defense against the claims, arguing that investors who bought mortgage-backed bonds knew they were taking a risk. Just because those bets aren’t paying off, lenders say, investors shouldn’t expect to get their money back.

“If you think about people who come back and say, ‘I bought a Chevy Vega but I want it to be a Mercedes with a 12-cylinder,’ we’re not putting up with that,” Bank of America CEO Brian Moynihan told analysts and shareholders in a conference call last month. “We’re protecting the shareholders’ money.”

Lawyers representing mortgage bondholders don’t see it that way.

“That argument is just dead wrong,” said Talcott Franklin, a Texas attorney who is helping investors take on lenders. “These are warranty claims. Whether we bought a Vega or a Mercedes, it was under a warranty. And they violated the warranty.”

In many of these cases, investors are invoking language in the bond offering that allows them to force the lender to buy back a bad loan, a process known as a “put back.”

At the height of the housing boom, rising home prices allowed mortgage originators to replace failed loans with freshly-written performing mortgages. Lenders, originators, investors and borrowers all assumed that there was little risk in churning out new mortgages because even if a loan defaulted, the rising value of the home securing it would minimize any potential losses.

But when home prices began falling, many of those bad loans came back to haunt the companies that had underwritten them. With demand for new mortgages drying up, there weren’t enough new loans to replace the ones that were going bad.

With home prices still falling and mortgage defaults rising, losses on foreclosed homes are now hitting even those investors holding top-rated bonds. By some estimates, at least as many homeowners are currently at risk of foreclosure as have already lost their homes.

“It took a while for the losses to eat through and start to affect the majority of investors,” said Franklin, the Texas attorney. “Now that that’s happening, there’s going to be more interest” in these loss claims.

The claims are complicated by restrictions that require a minimum number of investors from a given pool of mortgages – often 25 percent – to file a claim. That has been difficult because many mortgage pools were sold off to dozens or hundreds of different investors.

To overcome that hurdle, Franklin has set up a clearinghouse for investors to find each other. He estimates his database has grown to holders representing more than a third of the $1.5 trillion market in mortgage-backed securities – “and it’s growing every day by leaps and bounds.”

The potential cost of these claims will depend on how many more homes are lost to foreclosure, how much further home prices fall, how far the value of those properties will have to be written down when those foreclosed homes are sold.

“This could be a large hit for the entire industry,” said Brian Maillian, CEO of Whitestone Capital Group, which advises investors. “When you look at the scope of the problem, it’s a very, very large problem. We really don’t know how deep the hole is.”

Goldman Sachs recently estimated that “put backs” could cost the four largest lenders – Bank of America, JP Morgan Chase, Wells Fargo and Citibank – a combined $26 billion. Goldman Sachs estimates more than 12,800 put back claims had been filed cumulatively as of the third quarter – up from 7,500 claims a year earlier.

Working through those claims – in some cases loan by loan – could take years. As long as lenders continue to post healthy profits, that lengthy process would work in lenders’ favor. By spreading the losses over several years, lenders hope to pay most of the tab with future profits.

That could hurt shareholders as fears of future losses weigh on lenders’ share prices, which have declined as the pace of claims has quickened. But it would help lenders avoid a sudden hit to their balance sheets.

Because mortgage-backed bonds are widely held by insurance companies, endowments, pensions and mutual funds, the impact could be widespread, said Franklin.

“Where you’re really going to see the hit is off in the future a few years, when there’s no money to pay your life insurance policy or when your pension is gone or when your mutual fund is unable to pay you the interest rate they promised you,” Franklin said.

 

California foreclosure aid fund swells, but banks hesitate

The state’s Keep Your Home plan has grown to $2 billion from $700 million. However, mortgage servicers haven’t officially agreed to participate in the principal reduction part of the program.

November 10, 2010|By Alejandro Lazo and E. Scott Reckard, Los Angeles Times
Federal funding for a California plan that helps borrowers facing foreclosure has snowballed to $2 billion, enough to potentially help more than 100,000 homeowners.

But the program lacks formal agreements with the nation’s largest banks and investors, and their cooperation is needed to make the proposed effort broadly successful.

Out of the three major mortgage servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — only Bank of America has told the state that it will participate in a central part of its Keep Your Home program that would reduce the principal balance of certain troubled mortgages, and even BofA has yet to sign an agreement. Fannie Mae and Freddie Mac have declined to participate in the principal reduction part of the plan.

The Keep Your Home program, which uses federal funds reserved for the 2008 rescue of the financial system, is intended for low- and moderate-income people who own only one property. To qualify in Los Angeles County, a family of four couldn’t earn more than $75,600. The maximum benefit for any household participating in the program is $50,000.

The biggest part of the plan gives $875 million in temporary financial help to homeowners who have seen their paychecks cut or have lost their jobs. The program would provide as much as $3,000 a month for six months to cover home payments, including principal, interest, insurance and homeowner association dues.

Another piece would provide as much as $15,000 to help homeowners get current on their mortgages, and another would provide assistance to move for those people who can’t afford to remain in their homes. Most of the big banks and Fannie and Freddie have signaled that they’re willing to participate with these parts of the plan.

But the most controversial part of the program, and the one most difficult for banks and investors to sign on to, dedicates $790 million to principal reduction. This would write down the value of an estimated 25,135 “underwater” mortgages, which are loans in which homeowners owe more on their properties than what they are worth.

The California plan — as well as programs created by Nevada and Arizona — would pay lenders $1 for every dollar of mortgage debt forgiven. Experts say reducing principal on such underwater loans would go far to reducing foreclosures in the three states because home values have fallen so steeply that homeowners are tempted to walk away from their obligations.

But the financial industry has been reluctant to participate in government-administered programs that would require them to reduce the amount that borrowers owe them.

“If you can’t do the principal write-down, you are limited in what you can do,” said Dan Immergluck, an associate professor at the Georgia Institute of Technology, who studied the different state plans developed with the federal bailout money.

“It is one thing for them to agree not to write down principal when they are being asked to foot the whole bill,” he said, “but when the states are agreeing to match this 50-50, it seems rather ridiculous of the servicers and the investors not to agree to this.”

Diane Richardson, director of legislation for the state’s housing finance agency, which created the California plan, said she expects other lenders to follow Bank of America’s lead once the program is underway.

“Once the program gets going, and other lenders see how successful it is, I think others will come aboard,” she said. The Keep Your Home program was slated to begin Nov. 1, but the launch was pushed back until early next year because the effort grew in complexity and size from when it was announced in February.

Originally, five states in which home values had dropped more than 20% since 2006 were selected to receive $1.5 billion from the Treasury Department’s Troubled Asset Relief Program. The program grew to cover states with high unemployment, which included California, and more federal money was added. California was initially slated to receive $700 million when the Treasury approved the state’s plan in July. Then even more money was added, resulting in a $7.6-billion program involving 18 states and the District of Columbia.

California, which accounts for 21% of the nation’s foreclosure activity, is the largest recipient of the bailout money. Homeowners in the Golden State also remain deeply underwater, according to recent data. In California, 27.9% of homeowners who owned single-family residences were underwater at the end of the third quarter, according to data released Wednesday by real estate information site Zillow.com. In Los Angeles County, 17.4% of borrowers owed more on their mortgages than what their homes were worth.

Even as the state struggles to get big lenders to sign on, the program has provoked complaints that it’s a giveaway to the banks. Critics say property values have fallen so steeply that much troubled mortgage debt is not worth 50 cents on the dollar. Foreclosures on these homes are so costly that the banks will come out ahead financially by writing down loan balances to keep borrowers in the homes, they contend.

“I don’t think we should have to be paying the lenders,” said Prentiss Cox, a professor at the University of Minnesota Law School Clinic. “We have already paid them in the form of the bailout, and it seems to me what we need is enforced loan modification, because that is in everyone’s interest.”

Critics also are unhappy that homeowners who refinanced their homes to take cash out of their properties will not be allowed to participate in the program. That will exclude many African American and Latino borrowers in low-income communities who were hustled into loans they did not understand or could not afford, said Yvonne Mariajimenez, deputy director of Neighborhood Legal Services of Los Angeles County.

These borrowers were “enticed by predatory lenders to refinance and pull out equity to pay medical debt, fix their houses and the like,” Mariajimenez said. “A disproportionate number were people of color that live in minority communities.”

Getting banks to write down principal has proved difficult through government programs, though some lenders have done it through their own proprietary initiatives. The federal government’s loan modification program, which is also funded by money from TARP, has always allowed loan servicers to forgive principal on troubled mortgages, but has never required them to do so.

Proponents of forgiving principal say this is a serious flaw. They contend that debt forgiveness is the only workable way to address the problem created by underwater loans.

 

Home Sales Could Enter ‘Virtuous Cycle’

Nov 8th 2010

Rob Freedman, REALTOR® Magazine

 Consumer confidence and business spending are key to whether the U.S. housing market will move into a virtuous or a vicious cycle in 2011, NAR Chief Economist Lawrence Yun told a packed audience at the Residential Economic Outlook Forum Friday in New Orleans.

After the downturn, the housing market has clawed its way back to a point of near stability, Yun said, with the pace of new foreclosures easing, sales moving toward historically normal levels and prices on a national basis gaining modestly.

At the same time, affordability remains strong. He said all of the price excesses from the housing bubble have been squeezed out. In San Diego, for example, buyers today would pay $1,564 a month in mortgage payments for a house that at the height of the boom would have cost them $2,833 a month.

The broader economy is also showing positive signs, with businesses enjoying strong profits, sitting on huge cash reserves, and even adding jobs. Yun predicts this positive trend to continue into 2011, with existing home sales reaching 5.5 million units, prices rising a modest 1 percent, and the U.S. gross domestic product increasing to about 2.5 percent. 

“We are entering a virtuous cycle,” he said. But for the positive trend to continue, he added, businesses will have to start spending some of their cash to fuel job growth at a far greater pace than they’re doing now. Currently, businesses are adding jobs at a pace of about 100,000 a month. That needs to grow to about 400,000 a month for unemployment
to start shrinking.

The scenario will be far more negative if businesses continue to sit on their cash. In that case, sales will fall, inventories will rise, the high rate of foreclosures will resume, and the cost to the federal government of bailing out Fannie Mae and Freddie Mac will surge.

Federal Reserve Governor Thomas Koenig, who shared the data with Yun, said the Fed’s continued effort to spur the economy, most recently through a $600 billion bond buying program, is understandable given concerns over the slow pace of growth. But the continued subsidization of the market could unleash inflationary forces.

Yun said he sees possible evidence of inflation building, but it’s not visible now because the housing-cost portion of inflation measurements is holding down prices.

Fed: Small banks crack down on mortgage lending

By Annalyn Censky, staff reporterNovember 8, 2010

NEW YORK (CNNMoney.com) — Even with interest rates at historic lows, you might still have a hard time getting a mortgage: Small banks have tightened standards when it comes to lending to homebuyers, according to a survey issued Monday.

After easing their standards in July, commercial banks reversed that trend in October, the Federal Reserve reported Monday after surveying loan officers at 77 banks.

Smaller banks — those with annual sales of less than $50 million — mostly tightened their standards for traditional mortgages in the last three months, and large banks — those with assets of more $20 billion — widely left their standards unchanged, the Fed said.

Signaling that banks are continuing to crack down on the riskiest mortgages, less than half of the banks participating in the survey made sub-prime loans in the last three months.

Banks’ willingness to lend money has become a focal point in the economic recovery. Economists warn that sluggish consumer and business spending are both holding the recovery back, and some say, tighter credit conditions are part of the problem.

But at the same time, banks maintain that they are lending even as the appetite for new loans has dropped off.

In the latest Fed survey, many banks reported weaker demand across a broad range of loans, including mortgages, credit cards and business loans.

That drop in demand is “disturbing,” said Paul Ashworth, senior U.S. economist with Capital Economics, especially after the Fed announced at least $600 billion in monetary stimulus last week. The policy, known as quantitative easing, is meant to boost consumer and business spending by making it cheaper to borrow money.

“On this evidence, claims that quantitative easing will lead to a new boom in bank lending look well wide of the mark,” Ashworth said in a research note. ” In practice, lenders remain reluctant to lend and borrowers remain reluctant to borrow.”

At the same time that banks tightened or left standards unchanged for mortgages, almost all the banks in the Fed survey reported easing standards on commercial and industrial loans over the last three months.

And while some smaller banks tightened their standards for approving credit cards, most large banks eased their standards in that category.

Banks cited a “less uncertain economic outlook” and increased competition from other banks, as reasons for easing their standards, but said they don’t expect still-tight lending standards to return to their pre-recession averages for the “foreseeable future.”