In today’s housing market, some are beginning to wonder if we’re returning to the riskier lending habits and borrowing options that led to the housing crash 15 years ago.
Several times a year, the Mortgage Bankers Association (MBA) releases an index titled the Mortgage Credit Availability Index (MCAI). This index essentially determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes.
Recently (in April ’22), the index contracted by 3.2%, meaning lending standards tightened. Regarding the index’s recent decrease, Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting stated:
“Mortgage credit availability fell for the second month in a row, as lenders reacted to the jump in mortgage rates over the past two months. With the rate/term refinance business drying up, lenders have reduced the availability of government streamline refinancing programs, which are no longer as relevant of an option for many borrowers.”
Here’s a graph of the MCAI dating back to 2004, when the data first became available:
As the graph shows, the index stood at about 400 in 2004 and we approached the subprime mortgage crisis. Mortgage credit became more available as the housing market heated up, and then the index passed 850 in 2006. When the real estate market crashed, so did the MCAI as mortgage money became almost impossible to secure. Thankfully, lending standards have eased somewhat since then, but the index is still low. In April, the index was at 121, which is about one-seventh of what it was in 2006.
Why Did the Index Get out of Control During the Housing Bubble?
In short, the main reason was the availability of loans with extremely weak lending standards. To keep up with demand in 2006, many mortgage lenders offered loans that put little emphasis on the eligibility of the borrower. Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to maintain payment.
An example of the relaxed lending standards leading up to the housing crash is the FICO® credit score associated with a loan. During the housing boom, many mortgages were written for borrowers with a FICO score under 620. While there are still some loan programs that allow for a 620 score, today’s lending standards are much tighter. Lending institutions overall are much more attentive about measuring risk when approving loans. According to the latest Household Debt and Credit Report from the New York Federal Reserve, the median credit score on all mortgage loans originated in the first quarter of 2022 was 776.
The graph below shows the billions of dollars in mortgage money given annually to borrowers with a credit score under 620.
In 2006, buyers with a score under 620 received $376 billion dollars in loans. In 2021, that number was only $80 billion, and it’s only $20 billion in the first quarter of 2022.
In 2006, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. These are two very different housing markets, and today is nothing like the last time.