One Reason Why Home Loans Today Aren’t What They Were in the Past

In today’s housing market, many 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.?Let’s ease those concerns.

Several times a year, the?Mortgage Bankers Association?(MBA) releases an index titled the?Mortgage Credit Availability Index?(MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

Basically, the index determines how easy it is to get a mortgage.?The higher the index, the more available mortgage credit becomes.?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. 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 many lending guidelines tightened. 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?

There were many factors creating the perfect storm that led to the financial crisis of 2008 —including but not limited to, inflated housing prices in parts of the country, the monthly payment increases on Adjustable-Rate Mortgages (ARMs) when the interest rates moved from the initial fixed period to the adjustable period, the proliferation of the sub-prime market in earlier years, and other factors.

While there were many factors that contributed to the financial crisis of 2008, this article discusses only one of those factors - FICO? score. The website?myFICO?explains:

“A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO? Scores are the standard for credit scores—used by 90% of top lenders.”

During the first half of the 2000s, the sub-prime mortgage market proliferated, increasing the number of mortgages that were originated for borrowers with a FICO score under 620. 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.?While again a borrower’s credit score was not the only factor leading to the financial crisis, it was one of many factors.

The graph below shows the billions of dollars in mortgage money originated 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.

Bottom Line

Although this article only discusses one factor of many that led to the 2008 financial crisis, in 2006, lending standards were more relaxed while today, standards are tighter. These are two different housing markets.

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Disclosures:

All loan programs and availability of cash proceeds are subject to credit, underwriting and property approval. Programs, rates, terms and conditions are subject to change without notice. Other restrictions apply.

This communication is provided for use by real estate or mortgage professionals only and is not intended for distribution to consumers or other third parties. This does not constitute an advertisement as defined by Section 1026.2(a)(2) of Regulation Z.

Sprout Mortgage, LLC, NMLS# 1844521 (www.nmlsconsumeraccess.org), 1680 SW St. Lucie West Blvd, Suite 208, Port Saint Lucie, FL 34986, 800-403-7518. For complete licensing information, visit?www.sproutmortgage.com/licensing. Equal Housing Opportunity.?

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