The Two-Sided Credit Picture

Credit availability in the mortgage industry increased slightly in the fourth quarter, reversing a long-time downward trend over the last four quarters. However, credit access is not the same across the board.

The Urban Institute' s Housing Finance Policy Center’s latest credit availability index (HCAI) shows that mortgage credit availability rose to 5.6 in the fourth quarter of 2015, up from 4.9 in the previous quarter.

"A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan." the report said. "A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan."

According to the report, mortgage credit availability among Fannie Mae and Freddie Mac has been at the highest level over the past four quarters since its low in 2010 and reversing course in the second quarter of 2011. From the second quarter of 2011 to the fourth quarter of 2015, the total risk taken by the GSE channel increased 50 percent, from 1.4 percent to 2.1 percent.

Urban Institute stated that both the government channel (Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture Rural Development program) and portfolio and private-label securities channel remain close to or at the record low on the amount of default risk taken by the two markets.

But the credit picture is not the same across the board.

New data in the Urban Institute's Chartbook for May 2016 showed that access to credit has become extremely tight, particularly for borrowers with low FICO scores. The mean and median FICO scores on new originations have both risen about 40 and 42 points over the last decade. In addition, the 10th percentile of FICO scores, which represents the lower bound of creditworthiness needed to qualify for a mortgage, stood at 666 as of February 2016. This threshold held steady in the low 600s before the housing crisis. LTV levels at origination remain relatively high,, averaging 85, which reflects the large number of FHA purchase originations.

"Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the precrisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market," Urban Institute said.