Lending Standards Are Not Like They Were Leading Up to the Crash
You may be concerned about a housing crisis, but there are several reasons why the current market isn't like the one we experienced in 2008. One example is how lending criteria differ today. Here's a look at the data to back it up.
The Mortgage Bankers Association (MBA) publishes the Mortgage Credit Availability Index (MCAI) once a month. According to their official 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.”
In essence, the index influences how easy it is to obtain a mortgage. Examine the graph below of the MCAI since they began tracking this data in 2004. It demonstrates how lending requirements have evolved over time. It operates as follows:
▪ When lending rules are relaxed, it becomes simpler to obtain a mortgage, and the index (the green line in the graph) rises.
▪ When lending criteria tighten, it becomes more difficult to obtain a mortgage, and the index line falls.
The index was about 400 in 2004. However, by 2006, it had risen to over 850. Today's story is very different. Since the crash, the index has fallen as lending rules have tightened, making it more difficult to obtain a mortgage today.
Loose Lending Standards Contributed to the Housing Bubble
One of the key reasons for the housing bubble was that lending criteria were much looser back then. Realtor.com expresses it this way:
“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment and couldn’t actually afford homeownership.”
The high peak in the graph above demonstrates that prior to the housing crisis, credit was considerably simpler to obtain, and loan criteria were not stringent. Credit was easily available at the time, and the qualification criterion for a loan was low.
Lenders were accepting loans without always conducting a verification process to determine whether the applicant would be able to repay the amount. This meant that creditors were financing more borrowers who were more likely to default on their loans.
Today’s Loans Are Much Tougher To Get than Before
As previously stated, lending rules have evolved significantly since then. The following is how Bankrate characterizes the distinction:
“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”
Looking back at the graph, you'll observe that after the high around the time of the housing meltdown, the line indicating the index dropped drastically and has been low ever since. In fact, the line is far lower than it was even in 2004 - and it's getting lower. MBA's Joel Kan, VP, and Deputy Chief Economist presents the most recent May update:
“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”
The declining score indicates that standards are becoming considerably stricter, indicating that we are far from the extreme lending practices that lead to the catastrophe.
Prior to the housing catastrophe, lending standards were significantly more permissive, with little consideration given to borrowers' ability to repay their loans. Standards are now stricter, and the risk is lower for both lenders and borrowers. This demonstrates that these are two quite distinct housing markets and that this market is not like the last.
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