WASHINGTON — Ongoing uncertainty and mounting regulations are leading to less credit availability for potential home buyers, Federal Reserve Board Gov. Elizabeth Duke said Monday.

"Just as uncertainty about job prospects or house prices has likely discouraged some potential buyers from purchasing homes, it is likely that uncertainty has also affected mortgage lenders," said Duke, in a speech at the National Association of Realtors mid-year conference.

While declines in home prices have eased, the effect of large number of underwater borrowers and mortgages still in the foreclosure pipeline remain unclear and have continued to have a drag on a housing recovery, said Duke. Currently, there are 2.2 million loans in the foreclosure process and another 1.7 million loans that are three or more payments behind.

This has made the jobs of residential appraisers and lenders even more difficult, Duke said, and pushed lenders to take a more conservative view on the market value of the home and employ much more conservative underwriting.

"These factors should discourage or even disrupt sales that might otherwise happen smoothly," said Duke.

Lenders, she said, have also been more conservative in making mortgages that are guaranteed by the government-sponsored enterprises, Fannie Mae and Freddie Mac based on the results of the latest Senior Loan Officer Opinion Survey released in April.

Among the reasons lenders gave in the survey included the borrowers' difficulty in obtaining affordable private mortgage insurance, a less favorable economic outlook, and the forecast of future home prices. But equally important is the fear of the risk of credit loss, known as "putback risk."

"The ability of the GSEs to put back loans when lenders have misrepresented their riskiness helps protect taxpayers from losses; however, if lenders perceive that minor errors can result in significant losses from putback loans, they may respond by being more conservative in originating those loans," said Duke.

There are efforts by the Federal Housing Finance Agency to make strides to improve risk management, she said.

The reluctance by lenders to make loans because of the higher cost of servicing delinquent loans likely also stems from uncertainty about future standards for servicing.

The state attorneys' general entered into a settlement with the five largest servicers while federal banking regulators forced 14 servicers to agree to consent order over many of the same misdeeds. Those agreements, however, only cover about two-thirds of the mortgage market.

There are also other efforts underway by the Consumer Financial Protection Bureau to establish additional mortgage servicing standards for all loans. The FHFA, for its part, is already working to create a single servicing pool for Fannie and Freddie loans.

Such efforts, while positive, add further uncertainty as rules are gradually completed, Duke said.

"While we hope that the prospect of uniform national servicing standards will lead to more consistent, efficient, and fair servicing practices, it is also generating uncertainty about the future costs of servicing mortgages and may be a factor in decisions by servicers to delay or abandon investments in servicing capacity," said Duke.

Other factors are potential new standards from FHFA on servicer compensation as well as capital regulatory requirements that servicers will likely face as a result of the proposed Basel III rules. The new standards are expected to limit the amount of mortgage servicing rights an institution can include in its regulatory capital.

"This circumstance, in turn, could reduce the liquidity in the market for mortgage servicing rights and potentially drive valuations down," said Duke. "The final design of servicer compensation along with servicing requirements will factor into the capital allocated to the mortgage business generally and to the relative tightness of credit standards."

Separately, two significant rules under Dodd-Frank to define what a "qualified mortgage" as well as a "qualified residential mortgage" is may "significantly influence mortgage underwriting as well as the cost and availability of mortgage credit," Dukes said.

"The Federal Reserve is aware of this situation and will apply its best judgment to weigh the cost and availability of credit against consumer protection, investor clarity, and financial stability as it writes rules that are consistent with the statutory provisions that require those rules," said Duke, arguing that the mortgage market will ultimately benefit from the final rules.

Lastly, Duke cited continued uncertainty about the future of the GSEs since policymakers have yet to reach a consensus about the future of Fannie and Freddie.

"These uncertainties about the future are likely contributing significantly to the tight lending standards in the mortgage market today," said Duke.

The Fed governor urged policymakers to take action sooner rather than later.

"Until these tough decisions are made, uncertainties will continue to hinder access to credit, the evolution of the mortgage finance system, and the ultimate recovery in the housing market," said Duke. "The most important prescription for the housing market is for these decisions to be made and the path for the future of housing finance to be set."

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