Obama Wants to Ease Mortgage Credit, But He Can't Say How

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There has been talk of other alternatives such as allowing Fannie Mae and Freddie Mac to purchase private loans and refinance them or lowering interest rates through the government's Home Affordable Modification Program, which won't require legislation. However, there was no mention of these ideas in Obama's address.

The president also referred to "overlapping regulations" that kept "responsible young families from buying their first home." He urged Congress to "streamline the process and help our economy grow."

Banks have said that a number of regulatory and legal uncertainties prevent them from extending mortgage credit. JPMorgan Chase CEO Jamie Dimon has notably highlighted this problem and called for more coordination between regulators.

New capital rules require them to hold more capital against riskier mortgages. Fear that investors would force them to repurchase mortgages that default has made banks overly cautious, extending loans to only those with pristine credit.

The Consumer Financial Protection Bureau's qualified mortgage rule will require banks to extend credit only to those borrowers who can meet tough criteria on debt-to-income limits and who can provide documentation on income.

The CFPB's new rules could remove half of today's mortgage market , by Core Logic's estimate.

The problem is all these regulations are designed to create a more responsible lending market. Few would want banks to go back to the lax lending standards of the past.

While the pendulum may have swung too far in the other direction, it is unclear what policy makers can do to ease credit without relaxing regulations on banks.

The fact is the government has already laid the groundwork to ease access to credit. The Federal Reserve is keeping interest rates at rock bottom. Fannie Mae, Freddie Mac and the FHA continue to play an outsized role in the housing market, backing nine out of 10 mortgages.

The problem is lawmakers are also simultaneously prosecuting banks for reckless lending practices at the height of the boom. That does not help loosen credit.

Perhaps that is why Obama steered clear of bashing Wall Street in his speech Tuesday.

And that may be more welcome news for banks than for borrowers.

-- Written by Shanthi Bharatwaj in New York

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