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Who Deserves a Little More Credit?

HELOCsThe Housing Finance Policy Center with Urban Institute has released its Q2 2018 Housing Credit Availability Index (HCAI). The HCAI tracks the amount of mortgage credit available as well as the percentage of home purchase loans likely to go into default after missing payment for more than 90 days. The report released along with the index further distinguishes between the sources of the default risk: whether it stems from borrowers’ inability to pay or the products that service their loans.

Overall, the HCAI indicates a decline to 5.7 percent from a peak in Q1 2018 of 5.9 percent, the highest the index has climbed since 2011. This small dip quarter over quarter is a consequence of a shift in the market’s composition: while the government channel saw a loss in market share, the portfolio channel grew, and because the government channel has looser lending standards, this has had consequences on the total amount of credit available.

A higher HCAI signifies that lenders are willing to take on a greater risk of default and so also how easy it is to acquire a home loan. The credit available to homebuyers remains far tighter than it was prior to the housing bubble burst—at least half of what it was in pre-bubble years.

But because the index also gauges risk from borrowers contrasted against risk from services, it reveals more than just how much credit is available. Because product risk remains negligible, the index indicates that if credit were made more readily available to homebuyers, the risk posed would be slight. Just compare the current total risk posed in the index, or 5.7 percent, with the pre-crisis standard: 12.5 percent from 2001 to 2003. The report makes a subtly compelling argument that the stress felt in the market today from a gauntlet of forces (including rising mortgage rates, affordability issues, and a general lack of supply) could find reasonable respite in an expansion of credit available to prospective homebuyers. This would cause a corresponding increase in default risk, but presumably said risk would remain far below, and outside the perimeters, of the percentages that preceded the crisis of 2008.

The government channel today—which as mentioned above recently opened up its credit accordingly—represents the only segment of the market today servicing less-than-pristine borrowers.

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