Tight Mortgage Credit Isn't the Real Problem

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NEW YORK (TheStreet) -- The Obama administration is pushing banks to extend mortgages to more borrowers, arguing that credit standards have become overly tight in the wake of the crisis.

The Washington Post reported last week that officials are urging banks to use "subjective" judgment in making loans even as they adhere to new rules defining quality loans.

At a recent conference, Laurie Maggiano, director of policy for the Treasury's Homeownership Preservation Office, defended the push for looser credit standards, arguing that first time home buyers with lower incomes and limited credit history were locked out of the market. "Where are these folks supposed to live?" asked Maggiano, according to Housing Wire.

I suppose they will rent.

The Obama Administration's focus on loosening credit ignores the real problem -- incomes are not growing fast enough to keep pace with rising home prices.

A report from Zillow on Wednesday showed that record housing affordability is almost entirely due to low interest rates.

In the pre-bubble period from 1985 through 1999, when rates for a 30-year fixed mortgage ranged between 6 percent and 13 percent, Americans spent 19.9 % of their median monthly incomes, on average, on mortgage payments for a typical, median-priced home. At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4 % range, U.S. homeowners paid 12.6 % of their monthly income on mortgage payments, down 36.9 % from historic, pre-bubble norms, according to Zillow.

However, homes have become more expensive relative to incomes. "In the pre-bubble period, U.S. homebuyers spent 2.6 times their median annual income, on average, on the purchase price of a typical home. But through the end of 2012, buyers nationwide were spending three times their annual incomes, meaning homebuyers were buying homes that were 14.5 percent more expensive relative to their incomes than during the pre-bubble period," according to the report.

In San Jose, California, for instance, the percentage of monthly income dedicated to mortgage payments has dropped from 35% in the pre-bubble period to 29.5% in the fourth quarter of 2012. However, median home prices have shot up to 7 times median income in the region, from 4.6 times in the pre-bubble era.