Among the most persistent aftershocks of the recession is the continuing trouble that borrowers with less-than-pristine credit have when trying to get a mortgage. And there are no signs of the situation lightening up for those looking to buy a home, according to a new report by the Urban Institute.
According to the institute, which studied loan trends between 2009 and 2013, mortgage credit is tighter than it was at the peak of the housing bubble in 2005 and 2006. This is to be expected. However, “credit is also significantly tighter than it was in 2001, before the housing crisis,” the report states. “Today’s lenders are simply not originating loans for borrowers with less than perfect credit.”
The effects of the contemporary lending environment are rather significant. According to the institute, if the “cautious” credit standards of 2001 were in place in 2013, rather than that year’s “severe” standards, an additional 1.25 million loans would have been made in 2013. Moreover, “between 2009 and 2013, the number of ‘missing’ loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years,” the report states.
African American and Hispanic families have been particularly affected by tightened credit. The severe standards of 2013 translated to 50 percent fewer loans to African American borrowers and 38 percent fewer loans to Hispanic borrowers, compared to 2001. White borrowers were granted 31 percent fewer loans.
Asian-American borrowers were not affected at all, the report states. The findings jibe with recent studies into Asian-American credit and wealth, particularly a November report conducted by Marsha Courchane and Adam Gailey of Charles River Associates and Rajeev Darolia of the University of Missouri. That study found that Asian-Americans “have higher credit scores, lower debt-to-income ratios, and lower loan-to-value ratios” than other Americans, a fact that positions Asian borrowers well for obtaining mortgage credit. However, the authors cautioned that many less-fortunate Asian-Americans”face similar denial rates as similarly situated minorities.”
A main factor in the tightened credit environment is lender overlays due to repurchase risk, according to the Urban Institute. “About 80 percent of the loans made in the past few years have been bundled into securities guaranteed … by the U.S. government,” the report states. But because of uncertainty over how government agencies enforce this right, lenders “have reduced their risk with their own credit overlays, lending only to borrowers with far better credit than is required by the agencies.”
The institute also finds that lenders’ reluctance to write loans for even mildly risky borrowers is compounded by the high costs of servicing delinquent loans and fear of litigation by state and federal agencies.
“A tight credit box has severe consequences,” the report warns. “It means that fewer families will become homeowners at an opportune point in the housing market cycle.”