Leave a Message

Thank you for your message. We will be in touch with you shortly.

Why Home Loans Today Aren’t What They Were in the Past

Why Home Loans Today Aren’t What They Were in the Past
In today’s housing market, many are beginning to wonder if we’re returning to the riskier lending habits and borrowing options that led to the housing crash 15 years ago. Let’s ease those concerns.
 
Several times a year, the Mortgage Bankers Association (MBA) releases an index titled the Mortgage Credit Availability Index (MCAI). According to their 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.”
 
Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. Here’s a graph of the MCAI dating back to 2004, when the data first became available:
 
Why Home Loans Today Aren’t What They Were in the Past | MyKCM
 
As the graph shows, 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 as mortgage money became almost impossible to secure. Thankfully, lending standards have eased somewhat since then, but the index is still low. In April, the index was at 121, which is about one-seventh of what it was in 2006.
 
Why Did the Index Get 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.
 
An example of the relaxed lending standards leading up to the housing crash is the FICO® credit score associated with a loan. What’s a FICO® score? The website myFICO explains:
 
“A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores—used by 90% of top lenders.”
 
During the housing boom, many mortgages were written for borrowers with a FICO score under 620. While there are still some loan programs that allow for a 620 score, today’s lending standards are much tighter. Lending institutions overall are much more attentive about measuring risk when approving loans. According to the latest Household Debt and Credit Report from the New York Federal Reservethe median credit score on all mortgage loans originated in the first quarter of 2022 was 776.
 
The graph below shows the billions of dollars in mortgage money given annually to borrowers with a credit score under 620.
 
Why Home Loans Today Aren’t What They Were in the Past | MyKCM
 
In 2006, buyers with a score under 620 received $376 billion dollars in loans. In 2021, that number was only $80 billion, and it’s only $20 billion in the first quarter of 2022.
 
Bottom Line
 
In 2006, lending standards were much more relaxed with little evaluation done to measure a borrower’s 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, and today is nothing like the last time.

Recent Blog Posts

Stay up to date on the latest real estate trends.

Why Home Sales Bounce Back After Presidential Elections

With the 2024 Presidential election fast approaching, you might be wondering what impact, if any, it’s having on the housing market.

Planning To Sell Your House in 2025? Start Prepping Now

By starting your prep work early, you’ll give yourself plenty of time to get your house market-ready by the end of the year.

Two Reasons Why the Housing Market Won’t Crash

Demand for homes still outpaces supply, and unemployment remains low. And these are two key factors that will help prevent the housing market from crashing any time so… Read more

The Down Payment Assistance You Didn’t Know About

Believe it or not, almost 80% of first-time homebuyers qualify for down payment assistance, but only 13% actually use it.

East Bay Newsletter - Sept. 2024

Nationally, the monthly cost of financing a median-priced home was 8.3% lower in August 2024 than in June because the median home price declined 2.1% over the past two… Read more

San Francisco Newsletter - Sept. 2024

In August, the average 30-year mortgage rate declined for the third month to 6.35%, a 0.87% drop from the 2024 high reached in early May. The Fed is expected to cut ra… Read more

San Francisco Market Update - August 2024

Nationally, home prices hit an all-time high in June 2024, and we estimate that prices may have bucked seasonal trends and climbed slightly higher in July.

East Bay Market Update - August 2024

In July, the average 30-year mortgage rate declined for the third month, falling to 6.78%, a 0.44% drop from the 2024 high reached in early May. The Fed is poised to s… Read more

Are You "Buy-Curious"?

Join Elevation Real Estate and JVM Lending as they make the case that now may be a good time to buy rather than continue renting. An event that promises to be a game-c… Read more

Let’s Talk

You’ve got questions and we can’t wait to answer them.