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After years of post-crisis credit tightening, the availability of mortgage credit has slowly edged up from Q3 2013 to Q1 2015.
The Urban Institute’s (UI) Housing Finance Policy Center reported that 4.6 percent of purchase loans that are likely to default increased to 5.7 percent, according to the Housing Credit Availability Index (HCAI). This was mostly caused by loans backed by the government-sponsored enterprises (GSEs)—Freddie Mac and Fannie Mae—and also through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture’s Rural Development (RD) program, jointly called FVR loans.
“Despite the recent uptick, very significant space remains to safely expand the credit box: even doubling the default risk would keep the level well within the pre-crisis standard of 12.5 percent,” the report said.
The HCAI trends showed that the mortgage default risk the market is willing to take peaked from 2005 to 2007, mostly fueled by the popularity of risky loan products during the height of the housing bubble. After the crisis, the market eliminated almost all risky products and implemented more restrictive borrower credit standards.
According to the report, the total default risk the government loan channel is willing to take bottomed out at 9.6 percent in Q3 2013, then began to climb steadily to 10.8 percent by Q1 2015. Meanwhile, the GSE market the total risk taken increased by 17 percent from 1.8 percent to 2.1 percent. The PP channel took a higher product risk that any other channel during the bubble, with product risk around 0.6 percent and borrower risk around 2 percent.
The median credit scores for both GSE and government loans have been on a steady decline since 2013, UI reported. The median credit score for GSE loans stood at 758 as of May 2015, down from 769 for the same month two years ago. A similar drop was recorded among the government market, from 691 to 682 in the past two years.
“GSE and FHA lending dominates the postcrisis mortgage market, the report said. “Today’s tight credit box is largely the result of lender reluctance to lend to the full extent of credit box allowed by the GSEs and the FHA. One key reason has been deep uncertainty about when and why those entities will force lenders to take back the credit risk that they thought they were transferring to the GSEs and FHA, otherwise known as the put-back risk.”
UI concludes that credit was much too relaxed in the housing bubble years, but now the tables have turned a bit too much.
“Although small progress has been made, significant room remains to safely expand the credit box, the report said. “The mortgage market could have taken twice the default risk it took in the first quarter of 2015 and still have remained well within the cautious standard of 2001–03.”
