A Look At Mortgage Rates And Credit

Guy Raz interviews UCLA finance professor Stuart Gabriel. Gabriel talks about how fixed mortgage interest rates have hit a historic low, but it's harder for homeowners to qualify. He says credit is cheap and tight — two things we never used to see. He explains what has happened to cause interest rates to plunge while underwriting has tightened.

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GUY RAZ, HOST:

As Chris mentioned, some homeowners who were foreclosed on should have qualified for loan modifications. The good news today for consumers is that credit is cheap, very cheap. A 30-year fixed rate mortgage can now be found for around four percent.

Now, here's the bad news. Credit is also incredibly tight. Very few homeowners are benefiting because banks aren't lending as widely. But why?

Well, for more, we're joined by Stuart Gabriel. He specializes in real estate finance at UCLA.

Stuart Gabriel, welcome to the program.

DR. STUART GABRIEL: Pleased to be here.

RAZ: And let's start with those mortgage rates. One could argue that right now is quite possibly the best time to buy, right? You've got ultra-low borrowing costs and home prices at 14-year lows.

GABRIEL: You're a hundred percent correct. We have literally a historic confluence of the cheapest credit we've ever seen, together with house prices that have adjusted down in some areas by 30, 40, even 50 or more percent here in California. So that we do believe the worst of the downturn is behind us. For those who qualify for credit, this is indeed a buying opportunity.

RAZ: Well, let's talk about where a good deal meets reality because it's very difficult to get a loan, even more difficult to get a loan modification. Why is that?

GABRIEL: This is a rather unusual situation. Typically speaking, credit would be cheap and plentiful, or alternatively, expensive and tight. So how is it that credit is cheap but also tight?

Well, firstly, with respect to the fact that credit is cheap. The explanation is relatively simple. It begins with the fact that we have a very weak economy. And in the context of a weak economy, interest rates fall because there's weak demand for credit. And they fall because our monetary authority - the Federal Reserve - pushes down interest rates as a mechanism to get people to borrow and to spend and to revitalize the economy.

Another reason why rates are low in the United States today is that we have capital moving to the United States out of the uncertainty of Europe, and this is helping to drive down our interest rate environment here in the U.S.

RAZ: And so, essentially these bankers are driving down interest rates and yet, it is arguably more difficult to get a loan today than it's been in the last 10, 15, even 20 years. Why is that? What explains that?

GABRIEL: Well, Guy, the banks are very concerned about their balance sheets at the moment. They're seeking to rebuild their profitability. They've had a very difficult time with their mortgage investments. They've made a lot of mistakes. And they have tightened the underwriting requirements that are necessary for a consumer to get a loan...

RAZ: In other words, you have to have a very high credit score. I mean, in some cases, one could argue, unreasonably high.

GABRIEL: Credit scores on average have moved up 40 or 50 basis points with respect to the minimum credit scores that is required...

RAZ: Wow.

GABRIEL: ...to qualify for a loan. That correct.

RAZ: That's high. That's high. Stuart Gabriel, as you know, banks got into a lot of trouble for making loans to people who simply could not afford them. Now, they're being incredibly careful - maybe careful is an understatement - about who they loan to.

Is it possible that they've just simply swung the pendulum in the other direction or are banks actually lending at the correct rate that they should always have been lending at right now?

GABRIEL: It is indeed possible that the pendulum has swung. But I dare say, Guy, that we have a glimpse of the future here. I think when our mortgage finance system stabilize, they will stabilize with a lot of careful credit qualification check or underwriting of the borrower. We will not go back to the loose times that we saw during the boom period.

RAZ: That's Stuart Gabriel. He's with the Ziman Center for Real Estate at UCLA.

Stuart Gabriel, thanks.

GABRIEL: Thank you, Guy.

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