Home loan approvals have become more rare since the housing downturn, and opinions abound on why and what to do about it.

Quite a bit has been written about the reactionary lending policies that private mortgage originators began following after the market collapse in 2008, and the common narrative has been that such credit restrictions negatively impact housing.

We cover lending constantly on these pages (including from the contrarian viewpoint), but one perspective that we have yet to follow is that of the Federal Reserve, which threw its hat in the analytics game a couple weeks back with a widely-read white paper on housing that included, among other things, perspectives on home lending.

In the paper, the Fed argues, uncontroversially, that the credit bust in 2008 and waves of delinquent loans created a strong response from banks, which quickly changed their lending practices from loose credit to tight credit.

Though the Fed saw such a market correction as necessary, it feels the pendulum swung too far in the opposite direction.

“Mortgage lending standards were lax, at best, in the years before the house price peak, and some tightening relative to pre-crisis practices was necessary and appropriate,” the paper reads. “Nonetheless, the extraordinarily tight standards that currently prevail reflect, in part, obstacles that limit or prevent lending to creditworthy borrowers.”

Whether it be stricter underwriting, higher fees and rates, and stricter documentation requirements, all mortgages, even prime offerings eligible for GSE and FHA financing, have been beholden to more strenuous standards, and in the case of government-backed loans, the Fed sees little rationale behind the tighter controls.

“Other data show, for instance, that less than half of lenders are currently offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent – even though these loans are within the GSE purchase parameters,” the paper reads. “This hesitancy on the part of lenders is due in part to concerns about the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults in the future.”

Such scarcity, the Fed continues, has wide-ranging impacts on the housing market, especially when first-time homebuyers, who are among the more valuable components to housing demand, are unable to secure financing for their home purchases. That predicament is particularly notable in areas with higher-than-average unemployment and weaker economic productivity, and with housing demand subsequently dropping, so do home prices.

In an Agent Genius article on the Fed’s analysis, an analyst from The Texas Real Estate Center (RECON) offered some perspective on the white paper’s findings – and why lending is unlikely to increase in the coming months.

The analyst, Gerald Klassen, wrote in a blog entry, “The good news is that we can understand the reasons. The bad news is that self-preservation may prevent the problem from being fixed.”

Klassen then offers a rundown of the many factors lenders must consider when making loans, including costly servicing fees, FHA requirements and the threat of impending lawsuits and foreclosure, and concludes that it makes perfect sense why lending will not increase.

“If you were a lender facing all these challenges, would you make the loan?” she asks. “Demonization of mortgage lenders and servicers makes for great political theatrics. But it doesn’t make them want to lend more.”

Is Klassen on to something? Rather than bear down on lenders and snipe them from a distance, should we instead foster a more productive, positive lending environment?