Credit availability remains a glass half full

The Scotsman Guide - Victor Whitman - 13 February 2017

Credit conditions are still tight despite the fact that mortgage-denial rates are lower today than during the last housing bubble, the Urban Institute found in a recent study.

In 2015, the overall mortgage-denial rate was at 11 percent, 5 percentage points below the denial rate in 2005, the Urban Institute said. The denial rate is often used as a basis to determine trends in credit availability, but presents a misleading picture of reality, according to Urban Institute researchers with the group’s Housing Finance Policy Center.

During the subprime-lending boom a decade ago, many more people on the margins applied for mortgages and the denial rates were higher.

To get a more accurate picture of how denial rates reveal trends in credit availability today, the Urban Institute removed people with so-called perfect credit from the pool and evaluated only those who were on the margins. These were borrowers with a FICO score below 700 who didn’t make significant downpayments and had relatively high debt-to-income ratios. This is a group of borrowers who would more likely be affected by changes in credit availability.  

People with lower credit scores had denial rates of 34 percent in 2015. This has come down from 41 percent in 2013, but is significantly higher than the 26 percent denial rate recorded in 2005.

“There has been some improvement,” said Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center. “It is still higher than it was.”

Goodman said the most telling statistic that speaks to today’s credit conditions, however, is that people with lower credit ratings aren’t applying for mortgages.

In 2015, for example, lower-score borrowers represented 33 percent of all mortgage applications and represented 24 percent of the borrowers, which is little changed since 2012. These numbers remain much lower than in 2000, however, the last time the mortgage market had more “normal” credit conditions.

In 2000, the share of applications from lower-credit borrowers was 50 percent, and their share of the borrowers was 37 percent, the Urban Institute said.

During the height of last housing bubble in 2005, the share of applications from lower-score borrowers was 60 percent and the share of borrowers was 52 percent. Goodman said if more borrowers on the margins were applying for loans today, the current denial rates would be higher under the current credit conditions.

“It (the study) basically says that the credit situation is improving very slowly, but it also indicates that the real problem is the lack of lower-credit applicants due to discouragement,” Goodman told Scotsman Guide News. “The real difference [between today and before the 2006 period] is that you have so many discouraged borrowers.”

The Urban Institute has advocated for policy changes that would reassure lenders to open up the credit box, particularly to encourage more lending in the Federal Housing Administration (FHA) program.


The most-often quoted credit-availability indices suggest that credit has been loosening. The Mortgage Bankers Association’s index, for example, stood at 177.1 in January — up 77 points since the benchmark year in 2012. This indicates that credit has loosened from a period when the conditions were especially tight.

Other studies also present a different picture. The American Enterprise Institute’s (AEI’s) International Center on Housing Risk has denied for several years that credit is tight. Based on an evaluation of millions of loans, for example, it says the median FICO score of FHA home-purchase borrowers was 674 in April 2015, and that 40 percent of all homebuyers had less-than-perfect credit in 2013 and 2014.

“Credit is not tight today,” the AEI center’s co-director, Ed Pinto, said. “Credit is loose, and loosening it further would only drive house prices up even faster and would create even less affordability. It would not address the problem [of affordability] and potentially create a risk of a serious housing-price correction in the future.”