Home prices are staging a modest recovery in many parts of the country, even though mortgage rates are up nearly an entire percentage point since spring. The rise in borrowing costs has put the brakes on refinancing, with the Mortgage Bankers Association reporting activity recently slumping to a four-year low. Banks are now trying to make new mortgages to offset the shortfall, while at the same time bracing for the "perception of further rate increases" if the Federal Reserve scales back its bond-buying campaign.
Banking consultant Ken Thomas remarks, "This is all about maintaining market share in a shrinking market. When demand shrinks, the banks, to maintain market share, must increase the supply of credit by cutting rates -- which they will not do in this increasing rate environment -- or by reducing underwriting standards, which they are doing." Banking heavyweights like Wells Fargo are relaxing credit score and down payment requirements on some loans. Furthermore, banks are starting to consider sales with higher loan-to-value ratios and buyers with higher debt-to-income ratios.