Although mortgage rates have moved up recently they are still near historic lows. Rates today are lower than at any point before the start of 2009. So why are people blaming the lending industry with the slow pace of the economic recovery?

Basically, rates are low but lenders are practicing extremely restrictive lending practices. What’s interesting is the US government has spent billions giving money to the banks and taking bad loans off their books in order to get banks lending again. But the simple truth is that the banks have taken this money but engaged in more and more restrictive lending practices.

I am not saying that the bailout didn’t have any benefits. Without the bailout certainly more banks would have gone out of business. But the main purpose of the bailout was to encourage banks to lend.

Banks have grown more restrictive on who they will give out loans to. The desired credit scores have of course gone up but they have started turning down buyers for “declining income”. This is basically when someone’s income falls from one year to the next. The issue with this is of course that during a recession this affects more small business owners looking to purchase. No documentation loans are a thing of the past. While they were abused in the past they were also used by people with legitimate jobs with hard to track income (tattoo artists). Many banks are also using a four property rule where investors are limited to four loans. The idea was to limit bad loans but you can have cases of high income/high net worth individuals taken out of the market because they own 4 100k houses.

In addition to limiting loans based on the individual asking for the loan they have also limited it based on the property type. Many banks have exited the commercial and multifamily markets by increase mortgage rates substantially on these particular loans. Most lenders will no longer loan on non warrantable condos. Non warrantable condos are when half of the units are not owner occupied.

In addition to banks we are seeing appraiser problems. In 2003 companies like countrywide were doing drive by appraisals which is just what it sounds like. Today we are seeing extremely strict appraisals. We have seen properties that are cheaper than anything that sold in the neighborhood in 8 years not appraising. Before appraisers would catch heat for not appraising properties, but in the current environment appraisers can play it safe by under appraising a property. Basically appraisers are more likely to face heat from a bank based on a high appraisal instead of a low appraiser. To compound this problem banks are now using random appraisers. A great idea in theory but now you have appraisers looking at lakefront properties that know very little about lakefront properties. Combined with a tendency to come in low on appraisals this is a recipe for disaster.

So in the end we have mortgage rates lower than at almost any time in history but at the same time the banks are probably one of the main factors hurting the real estate market from recovering. The question for the market of course is what happens first. Do mortgage rates raise and then we are dealing with high rates and restrictive lending or do banks start pulling back some of the restrictions. The answer to that question will probably determine what the real estate market is going to look like in a year from now.