It has been a common theme from industry analysts and home sales and construction reports for at least five years; the recovery is being hampered, probably unduly so, by credit standards which are unnecessarily tight. Volumes have been written about why this is true and what the solutions might be but no other source in our experience has summarized the situation as starkly as the Urban Institute did in a headline last week.
"Four million mortgage loans missing from 2009 to 2013 due to tight credit standards"
Urban Institute analysts Laurie Goodman, Jun Zhu, and Taz George say that number is an estimate of the number of addition loans that might have been made during that time period if credit standards had been similar to those in 2001. For borrowers with anything less than pristine credit, they say, it is hard to get a mortgage today.
Mortgage credit is much tighter than at the peak of the housing bubble in 2005 and 2006 which given the fallout from lending in that period, the authors call "expected and appropriate." But they say it is also significantly tighter than in 2001 - prior to the housing crisis.
There are many factors that contribute to continuing tight credit. In addition to new post-crisis lending standards from FHA, Freddie Mac and Fannie Mae, lenders are imposing their own credit overlays. These arise out of concerns over loan repurchase demands from guarantors; the higher costs associated with servicing non-performing loans, and fear of litigation on the part of various state and federal government entities.
Regardless of the reasons behind the tight credit box, the consequences have been severe. First, fewer families are able to become homeowners. This deprives them of a critical wealth-building opportunity and holds back the recovery by limiting the pool of homebuyers. This in turn has harmed the larger economy as so much of it depends on housing; new home construction, furniture and appliance purchases, renovations, landscaping.
In making their estimate of missing loans Goodman, Zhu, and Taz also found that the number of loans in that category grew enormously each year - over 1.2 million in 2013 alone. This increase, they say, reflects a mortgage market recovery that is largely limited to households with excellent credit. The numbers of high-credit borrowers, that is those with a credit score of 720 or better has decreased by 8.9 percent compared to 2001, moderate-credit borrowers, those between 661 and 719, have dropped 37.0 percent and low-credit borrowers, those with scores below 660, have dropped 75.8 percent.
Put in other terms, high-credit borrowers make up the preponderance of those getting new purchase loans while those with low-credit have only a tiny share compared to 2001. Those in the two lower credit score categories made up 40 percent of borrowers in 2013 where they had held just under a 60 percent share in 2001. Further, those borrowers with credit scores below 660 had only a 10 percent presence in 2013 originations where they made up slight less than 30 percent of borrowers from 2001 through 2006.
To insure that millions of loans do not continue to go missing the authors suggest that policymakers strengthen ongoing efforts to improve credit access by resolving issues around loan repurchases, evaluating why the costs of servicing non-performing loans are so high, and reassure lenders that they won't face litigation with every default.
