Analysts from the Urban Institute recently put a hard
number on tight credit. The company says
that lenders failed to make about 5.2 million mortgages between 2009 to 2014
because of rigid underwriting standards.
An additional 1.1 million mortgages could have been processed in 2015 “if
reasonable lending standards had been in place.” All in all, 6.3 million mortgages that might
have been disappeared over that six-year period.
UI says that since the 2008 housing
crisis, borrowers with less than stellar credit have found it hard to obtain a
mortgage. Purchase mortgages declined from 4.6 million in 2001 to 3.5 million
in 2015 because of exceptionally high standards. Among the strictures facing less
creditworthy borrowers are:
“Overlays” or additional
restrictions, above and beyond FHA and GSE requirements, that lenders put on borrowing
because of concerns they may be forced to repurchase failed loans from
The high cost of servicing
Concerns about potential litigation over
says tight credit continues to frustrate borrowers, lenders, and policymakers, but
modest progress has been made. The Federal Housing Finance Agency (FHFA)
has taken many steps to address overlays, as has, to a far lesser extent, the
FHA. The numbers of 2015 loans that “went
missing” however, “supports the urgency of continuing regulatory and other
reforms that will make mortgages more accessible to all creditworthy borrowers.”
UI calculated how many mortgage originations
there would have been if borrowers of all credit levels faced the same mortgage
market in 2015 as they did in 2001. The table below shows that, across those
years the number of new-purchase borrowers with FICO scores above 700 dropped
1.4 percent from 2.35 million to 2.32 million. New-purchase borrowers with scores between 660
and 700 declined by 20 percent and those with scores below 660 fell 65 percent.
UI says it believes that the above-700
bucket was unconstrained by credit availability and, contracted only 1.4
percent. The assumption is that, absent the issue of credit availability, the
other two buckets would have contracted by the same amount resulting in 1.4
million loans in the below-660 bucket rather than 503,000. Roughly 911,000 loans that might have been
made, were not. In the middle bucket a 1.4 percent contraction would have resulted
in 849,000 originations for borrowers with scores of 660 to 700 rather than the
actual figure of 686,000. Another
163,000 loans that evaporated.
While the tight credit standards
appear to have reduced lending, they also apparently led to a higher share of
all-cash sales. There were 5.8 million
new and existing home sales in 2001, a number that increased to 8.2 million by
2005, dropped to 4.2 million by 2011 and climbed back to 5.6 million in
2015. “Despite the roller coaster ride,”
UI says, “home sales are now only 4 percent lower than they were in 2001”.
But purchase mortgages have dropped dramatically
over that time. There were 3.5 million first-lien purchase mortgages in 2015, compared
to 4.7 million purchase mortgages taken out in 2001, a 32 percent decline. Making up the difference between the modest
negative change in home sales and the dramatic decrease in purchase mortgage
lending was a growth in cash sales. Their share increased from 18 percent in
2001 to 39 percent in 2012, edging back to 33 percent in 2015. Many cash buyers
are investors, a situation the tight credit box has encouraged. With the delays and uncertainty created by a
tight credit environment, sellers often take a cash offer rather than waiting
on approval of a buyer’s mortgage application.
Figure 2 shows how tight credit has
become and how many fewer borrowers there are with decent but lower credit. Even as the number of loans decreased there
was still a drop in the share of borrowers with FICO scores below 660; from 31
percent to 14 percent from 2001 to 2015.
The share of borrowers with FICO scores between 660 and 700 remained
around 19 percent but the share with FICO scores above 700 increased from 51
percent to 66 percent.
UI concludes that,
while recent FHFA and FHA policy adjustments have
helped modestly to expand the credit box, their recent analysis shows there is
still much to be done. “These missing loans don’t just mean 1.1 million
families are deprived of sharing in the critical wealth-building opportunity of
homeownership. Fewer home sales also mean fewer construction jobs and lower
sales of consumer goods that homebuyers purchase when they move into their new
residence. Ultimately, this loss slows the entire US economy.” They say the impact of this tight credit
environment will reverberate for years to come.