Timely article from ‘Realtor’ magazine: by Lawrence Yun, chief economist for the National Assoc of Realtors provides an economic overview of why lenders are holding back to be originating mortgage loans.

full article February 2011
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Despite concerns about the negative long-term effects of federal stimulus efforts – including the impact they will have on the country’s huge budget deficit – the U.S. government continues to take action to help spur the economy.

However, the most effective solution for promoting growth and getting the housing market moving may rest with banks.

Residential mortgage loans that were originated in the last two years are among the best performing ever. Data from Fannie Mae and Freddie Mac show that 2009 mortgage originations have the lowest default rates in decades, with 1.2 defaults per 100 loans backed by Fannie Mae and 1.1 defaults per 100 backed by Freddie Mac. As recently as 2007 those figures were 28.7 and 22.3, respectively.
Given the strength of recent loan vintages, you’d think lenders would be jumping back into the business of making mortgage loans. But in fact they’re holding back. At a time when home sales should be around 5.5 million units, based on the country’s population, we’re forecasting only 5.2 million sales for 2011, about the same as in 2000—when the U.S. population was smaller by 27 million people.

Lenders have tightened underwriting so much that even households with solid credit backgrounds are simply not making the cut. For the past year or so, many lenders have raised minimum qualifying credit scores to as high as 640, meaning only households in the upper tiers of creditworthiness are getting conventional financing.

No one would advocate for a return to risky lending. But by simply returning to underwriting standards that are close to what has been historically normal, ¬lenders can do what the federal government is digging itself deeper into debt trying to do: spur the economy by getting responsible households back into the housing market.