Mortgage credit still in a post-crisis funk? The data begs to differ
In all of the recent 10-year commemorations of the financial crisis, a common theme has emerged among analysts and commentators: Mortgage credit is just too tight.
Lenders point to the effects of regulation that they say is overburdening lenders and leading to some borrowers losing out on homeownership. Others say the memory of mortgage lenders done in by easy-credit policies during the boom is still vivid, leading to today's lenders remaining cautious.
But an actual assessment of mortgage credit availability is more complicated. The conventional wisdom that the crisis and ensuing regulations have kept mortgage credit out of reach for the vast majority of borrowers is not backed up by the data.
“There are loans for almost every borrower in the marketplace if they want one,” said Christy Bunce, the chief operating officer at New American Funding, a lender based in Tustin, Calif.
Although credit definitely tightened in the immediate aftermath of the crisis, several data points show it has loosened considerably in the years since, and lenders on the ground portray a mortgage credit market with a diverse array of products for borrowers of varying financial backgrounds.
New regulations, such as underwriting requirements established by the Consumer Financial Protection Bureau, have probably made it harder to lend to borrowers with poor credit, but not impossible. And analysts say that while the affordability gap has gotten worse, that may be due to skyrocketing home prices more than anything else.
Data points to mortgage credit availability having taken a huge leap since 2012, in part because of access to low-down payment loans.
“If you look from 2012 to today, credit has gotten looser, particularly with respect to greater availability of low-down payment loans,” said Mike Fratantoni, chief economist and a senior vice president at the Mortgage Bankers Association.
Still, experts agree that following years of ballooning teaser rates and stated-income loans leading up to the 2008 meltdown, mortgage credit will likely never be as loose as it was back then — and that is a good thing.
“Nobody wants to get back into the mess that everybody was in during the meltdown,” said Bunce, a former vice president of underwriting at Countrywide Financial, which was sold to Bank of America in 2008. “We don’t want stated-income loans back or those kind of exotic loan programs. The credit box is pretty much where it should be.”
Just by origination volume alone, mortgage lending has made a dramatic recovery since the crisis.
In 2005, during the real estate boom, home purchase loans reached $1.5 trillion, according to data by the Mortgage Bankers Association. The market began to crater in 2008, bottoming out in 2011 at $505 billion, but then began a dramatic recovery in 2013. By last year, the volume of purchase loans hit $1.1 trillion, the same level reached in 2007.
"It’s the loosest credit since 2007, but nowhere near 2005 or 2006, which was unhealthy," said Lionel Urban, a vice president and product manager for bank solutions at Fiserv, a technology provider. "There’s tons of liquidity in the conforming space and that’s where everybody is competing, and they are competing hard now because volume and margins are compressing."
Other data suggests that mortgage credit access may never get back to where it was at the height of the boom, but has still made a sharp rebound since the aftermath of 2008.
The MBA tracks access to mortgage products with an index measuring the overall supply of credit based on a wide range of products that investors are willing to buy. The "mortgage credit availability index" suffered a sharp downturn from 868.7 in June 2006 to 92.6 in June 2011. But the index came back to 181 in June of this year, reflecting a loosening of down payment and credit score requirements since 2012.
“Yes, we’ve seen some loosening but we’re nowhere close to where we were in 2006,” said Fratantoni of the MBA.
Others note that while industry practices and regulatory decrees have forced lenders to significantly bolster documentation, corresponding improvements in technology have allowed companies to make those changes and still make credit available.
“Relative to the last housing boom, it’s hard to get a loan, but it’s probably much easier relative to long-term norms since you have to provide the same documentation but now there are ways you can do it more quickly with technology,” said Daren Blomquist, a senior vice president at Attom Data Solutions.
Evidence of the gradual loosening of credit over the past few years can be found in the slight uptick in foreclosure start numbers to 1.26% in vintage 2014 Federal Housing Administration loans, Blomquist said, compared with the long-term average of 0.7%.
“It’s a sign that a modicum of risk has returned to lending,” he said.
For less creditworthy borrowers and those with hard-to-document credit profiles, there is no subprime or Alt-A market anymore. But there are more than 200 down payment assistance programs that allow low- and moderate-income borrowers to get into a home provided they have decent credit.
Data shows that a range of factors, from down payments to loan-to-value ratios to debt-to-income ratios, have all loosened dramatically since the crisis.
In 2017, the median down payment for a purchase loan was 6.5%, up from an average of 4.5% percent in 2007, according to Attom Data Solutions.
The FHA’s guidelines remained unchanged during and after the crisis, with borrowers able to obtain a home loan with only 3.5% down. Both Fannie Mae and Freddie Mac currently offer low-down payment programs that require as little as 3% down.
In a handful of states with high home prices — including California, Colorado, Hawaii, Oregon, Massachusetts, New Jersey and New York — some lenders required a median down payment of 10% in 2017.
Meanwhile, in the first half of 2018, 11% of purchase loans had LTV ratios of 95% or higher, a tenfold increase from 2014, when a mere 1.2% of purchase mortgage loans were originated with LTVs of 95% or more.
To be sure, the regulatory environment has made aspects of mortgage origination more challenging, and the industry continues to push for changes to the CFPB's "Qualified Mortgage" rule and other regulations.
Bill Dallas, whose former company Ownit Mortgage Solutions became the first high-profile mortgage lender to close during the crisis in 2007, said regulations such as the CFPB requirements are keeping some self-employed borrowers, small business owners and borrowers with assets but no income, from getting a loan.
"We turn down potential borrowers all the time," said Dallas, now the president of Finance of America Mortgage. Yet "from an overall credit perspective, credit is not tight," he added.
"The income guidelines are restrictive. So credit is available but getting people to fit that box is difficult because the underwriting rules restrict income and assets," Dallas said.
Under the QM rule, lenders must document a borrower's income, assets, savings and debt using eight criteria known as Appendix Q, which the industry wants changed.
Don White, the chief credit officer at PennyMac, said documentation of self-employed income in the QM rule “is particularly onerous, especially for small businesses.”
But the impact of the QM rule on mortgage credit availability is also limited. Technically, the QM stamp of approval requires that a borrower must have a debt-to-income ratio of 43% or less. Lenders have complained loudly that that cutoff has disproportionately impacted low- to moderate-income borrowers. However, the CFPB rules carve out a seven-year exemption for loans backed by Fannie and Freddie, which expires in 2021.
Fannie and Freddie "have their QM 'patch,' and they don’t have to abide currently by Appendix Q requirements in order to be QM," said White.
And many agree that the CFPB rules are still in flux, and the bureau could make changes to QM that will provide more flexibility to lenders. Acting CFPB Director Mick Mulvaney — a Trump administration appointee focused on easing rules developed in the Obama administration — has shown a willingness to revise QM. But even former CFPB officials under Mulvaney's predecessor, Richard Cordray, are open to some changes.
“Appendix Q could be tweaked to allow a borrower to qualify if their assets support the monthly mortgage payment,” said Patricia McCoy, a law professor at Boston College Law School and a former assistant director for mortgage markets at the CFPB.