National Mortgage News -Jacob Passy - 22 November 2016
Tight lending standards resulted in 1.1 million fewer mortgages being originated than if looser requirements were in place, according to the Urban Institute.
The tight credit is largely the result of hesitancy on the part of lenders, the Urban Institute report released Monday argues. The implications of this depressed lending activity though are far-reaching, the report's authors argued.
"These missing loans don't just mean 1.1 million families are deprived of sharing in the critical wealth-building opportunity of home ownership," the researchers wrote. "Fewer home sales also mean fewer construction jobs and lower sales of consumer goods that home buyers purchase when they move into their new residence. Ultimately, this loss slows the entire U.S. economy."
The report cited three main contributing factors that have created the "overly" tight credit environment. The first are the overlays and additional restrictions lenders have placed on loan products, a response to concerns regarding repurchases of failed loans from the government-sponsored enterprises and the Federal Housing Administration. Additional factors include the higher costs associated with servicing delinquent loans and concerns about litigation.
The disparity was calculated by studying the decline in the number of borrowers within certain credit score ranges from 2001 and 2015.
The number of borrowers with a FICO score above 700 dropped 1% to roughly 2.3 million, as scaled to Home Mortgage Disclosure Act data, the institute's researchers noted in the report. Meanwhile, the number of borrowers with a FICO score between 600 and 700 fell 20% to 686,073, and the number of borrowers with a FICO score below 600 plunged 65% to 503,013.
Taking these figures, the institute calculated the number of "missing loans" by determining how many would have been made if credit access in 2015 were similar to 2001 standards. The researchers contended that borrowers with credit scores above 700 were not constrained by credit availability. Using this credit bucket's level of contraction, the researchers predicted that there would have been 911,074 more borrowers with scores below 600 and 163,026 more borrowers with scores between 600 and 700.
But the tight credit environment didn't just cause a reduction in lending — it also led to a spike in cash sales. While total home sales fell from 8.2 million in 2005 to 5.6 million in 2015, the number of mortgages dropped even more dramatically. Overall, the Urban Institute's researchers found that cash sales increased from 18% of sales in 2001 to 39% in 2012. Since 2012, that share has declined to 33%, still remaining well above precrisis levels.
"Many of these cash buyers are investors, a situation the tight credit box has encouraged," the report's authors wrote. "In a tight credit environment, sellers often take the cash bid to avoid the delay and uncertainty of waiting to hear if a mortgage application has been approved."
The report noted that the Federal Housing Finance Agency and FHA have both made policy changes to widen the credit box, but added that "there is still much to be done."