The Housing Market Then Versus Now

Given today’s housing market, many are beginning to worry about if we’re returning to the riskier lending habits and borrowing options that led to the infamous market crash 15 years ago. Let’s settle this debate and ease those concerns.

Several times a year, the Mortgage Bankers Association (MBA) releases an index titled the Mortgage Credit Availability Index (MCAI). Their website details:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

Simply put, the index shows how easy it is to get a mortgage. The more available mortage credit is, the higher the index is.

Why Home Loans Today Aren’t What They Were in the Past | MyKCM

Why Home Loans Today Aren’t What They Were in the Past

Why Home Loans Today Aren’t What They Were in the Past | MyKCM

In today’s housing market, many are beginning to wonder if we’re returning to the riskier lending habits and borrowing options that led to the housing crash 15 years ago. Let’s ease those concerns.

Several times a year, the Mortgage Bankers Association (MBA) releases an index titled the Mortgage Credit Availability Index (MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. Here’s a graph of the MCAI dating back to 2004, when the data first became available:

Why Home Loans Today Aren’t What They Were in the Past | MyKCM

The graph displays that in 2004 the index stopped at around 400. As the housing market heated up, the more available mortgage credit became; in 2006, the index crossed 850.

When the market crashed, the MCAI followed suit; mortgage money was virtually impossible to get. Fortunately, lending standards have somewhat relaxed since that time but the index is still relatively low. In April, it reached 121, about a seventh of the 2006 rating.

Why Did The Index Rating Go Off the Charts During The Housing Bubble?

Keeping it short, the main reason was because of the loan availabiity with radically weak lending requirments. In 2006, to keep up with the market's demand, many lenders gave out loans without conisdering the financial eligibility of the borrower. 

The FICO® credit score associated with a loan is a prime example of the unethical lending practices that lead up to the housing crash, Website myFICO further explains:

“A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores—used by 90% of top lenders.”

Many mortgages were written for people with a score of less than 620; and while there are still lending programs available to buyers with a lower score, the lending standards are much more rigourous than before. Companies overall are much more attentive to the risks that approving loans entails. The latesHousehold Debt and Credit Report from the New York Federal Reserve statesthe median credit score on all mortgage loans originated in the first quarter of 2022 was 776.

The graph listed blow exemplifies the billions of dollars that were lended to buyers with credit scores below 620.

Why Home Loans Today Aren’t What They Were in the Past | MyKCM

What was $376 billion dollars in loans for buyers under the 620 credit score in 2006 was only $80 billion in 2021, and $20 billion in 2022's first quarter.

In Conclusion

When the market crashed in 2006, the lending standards were much different, with little evaluation done on the borrower's financial eligibility to repay their loan. Today, the home loan process is much more secure, reducing the rish for lenders and borrowers alike. These housing markets are polar opposities in terms of home loan practices.

 

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