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Tight Credit Standards Create Up to 1.22M in ‘Lost’ Loans

Tight credit conditions have pushed as many as 1.22 million loans out of the market per year over the last few years, researchers at the Urban Institute (UI) assert in a new commentary.

Using calculations based on numbers from CoreLogic, UI analysts 24 percent of purchase loans in 2001—years before the crash—had FICO scores of less than 60, with that share dropping to 13 percent in 2012 and then 10 percent in 2013. At the same time, the share of loans with scores greater than 750 ratcheted up from 31 percent in 2001 to 45 percent in 2012 and 47 percent last year.

Reasoning that lower credit availability has played a role in larger home sales declines among those with lower FICO scores, the researchers then tweaked the data to calculate the number of sales that could have been made in 2012 had lending standards not changed over the preceding decade.

Their conclusion: “Based on the upper bound calculation, 1.22 million fewer purchase mortgages were made in 2012 than would have been the case had credit availability remained at 2001 levels.”

In an email, Laurie Goodman, director of UI's Housing Policy Finance Center and one of the report's authors, broke that figure down in dollars: "Assuming an average loan size of $150,000 which is a reasonable number for the 'missing loans', the dollar volume would be roughly $180 billion."

Admitting that the upper calculation method “likely ... [overstates] the impact of tighter credit,” they also calculated a scaled lower bound estimate of 273,000 “missing” first-lien purchase loans.

“The truth is somewhere between these estimates, but likely closer to the upper bound because many prospective borrowers with FICO scores well above 660 are affected by the tight credit box and credit overlays,” the report says. “The long-term impact of the credit tightness on households is particularly strong given that potential borrowers have been locked out of the market at an opportune time to buy their own home and begin to build wealth.”

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