Remember when former Federal Reserve Chairman Ben Bernanke revealed that he was having trouble getting his mortgage refinanced? At the time it was more a humorous anecdote about how tight the post-crisis mortgage market was. After enduring high levels of foreclosure, too many risky loans, and falling home prices, lenders responded by tightening credit standards. This was a response to the market as much as a response to pressure from regulators. As a result, many credit-worthy people, like Ben Bernanke, had trouble finding financing in the years following the market’s collapse.
Since then, credit has loosened significantly, and mortgage originations are actually at levels not seen since 2007; however, credit is still tight compared to the pre-bubble norm. Why is that? Interest rates are low, the economy is growing (although it has been somewhat sluggish), and home prices have fully rebounded in many markets. Why aren’t lenders extending more credit? That’s the question asked (and answered) by Daniel Goldstein with MarketWatch, and it’s a great look at the dynamics in the mortgage and real estate market. It also addresses a key problem facing many potential homebuyers, particularly those with little credit (read: Millennials) or those with less-than-perfect credit.
As reported by Goldstein, the Urban Institute released a study on the housing market that looks at the relationship between mortgage default rates and credit. The study found that default rates are far lower than the pre-bubble norm of 2%, further proof that lending standards are truly tight. Additionally, the vast majority (69%) of loans backed by Fannie Mae and Freddie Mac have FICO scores higher than 750; prior to 2003, that figure was closer to 33%. What this means is that there appears to be “room” for lenders to expand the so-called “credit box” and extend credit opportunities to more borrowers, right? But if borrowers with lower credit scores are included, doesn’t that run the risk of another collapse? Not so fast, say researchers at the Urban Institute. They point out that during the years when loan quality really declined (2006-2007), credit profiles remained roughly stable. What changed was the explosion of niche loan products, like Adjustable Rate Mortgages (ARMs) and low- or no-document loans. That seems to be the source of the loan default issues, not credit scores, according to the Urban Institute.
If the gist of the study (extending credit won’t necessarily harm loan performance) becomes crystallized in eyes of mortgage lenders and loan originators, you might see more companies begin to expand opportunities for Millennials and other credit-worthy borrowers.
For more on this topic, check out "Why it's gotten so hard for many people to get a mortgage" on MarketWatch.