Today, some are afraid the real estate market is starting to look a lot like it did in 2006, just prior to the housing crash. One of the factors theyâre pointing to is the availability of mortgage money. Recent articles about the availability of low down payment loans and down payment assistance programs are causing fear that weâre returning to the bad habits seen 15 years ago. Letâs alleviate these concerns.
âSeveral times a year, the Mortgage Bankers Association releases an index titled The Mortgage Credit Availability Index (MCAI). According to their website:
Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. Hereâs a graph of the MCAI dating back to 2004, when the data first became available:
As we can see, 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 (to below 100) as mortgage money became almost impossible to secure. Thankfully, lending standards have eased somewhat since. The index, however, is still below 150, which is about one-sixth of what it was in 2006.
Why did the index rage out of control during the housing bubble?
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 repay the loan.
âSome of these loans offered attractive, low interest rates that increased over time. The loans were popular because they could be obtained quickly and without the borrower having to provide documentation up front. However, as the rates increased, borrowers struggled to pay their mortgages.
Today, lending standards are much tighter. As Investopedia explains, the risky loans given at that time are extremely rare today, primarily because lending standards have drastically improved:
An example of the relaxed lending standards leading up to the housing crash is the FICOÂ® credit score associated with a loan. Whatâs a FICOÂ® score? The website myFICO explains:
During the housing boom, many mortgages were written for borrowers with a FICO score under 620. Experian reveals that, in todayâs market, lenders are more cautious about lower credit scores:
There are definitely still loan programs that allow a 620 score. However, lending institutions overall are much more attentive about measuring risk when approving loans. According to Ellie Maeâs latest Origination Insight Report, the average FICOÂ® score on all loans originated in February was 753.
âThe graph below shows the billions of dollars in mortgage money given annually to borrowers with a credit score under 620.
In 2006, mortgage entities originated $376 billion dollars in loans for purchasers with a score under 620. Last year, that number was only $74 billion.
In 2006, lending standards were much more relaxed with little evaluation done to measure a borrowerâs 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, so thereâs no need to panic over todayâs lending standards.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Cogent Real Estate Equities, LLC does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Cogent Real Estate Equities, LLC will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.