Lending Standards Are Not What They Were Prior to the Crash
You may be concerned about a housing crisis, but there are several reasons why the current market isn't like the one we experienced in 2008. One example is how lending criteria differ today. Here's a look at the data to back it up.
Every month, the Mortgage Bankers Association (MBA) releases 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. Take a look at the graph below of the MCAI since they started keeping track of this data in 2004. It shows how lending standards have changed over time. It works like this:
- When lending standards are less strict, it’s easier to get a mortgage, and the index (the green line in the graph) is higher.
- When lending standards are stricter, it’s harder to get a mortgage, and the line representing the index is lower.
The index was about 400 in 2004. However, by 2006, it had risen to over 850. Today's story is very different. Since the crash, the index has fallen as lending rules have tightened, making it more difficult to obtain a mortgage today.
Loose Lending Standards Contributed to the Housing Bubble
One of the main factors that contributed to the housing bubble was that lending standards were a lot less strict back then. Realtor.com explains it like this:
“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.”
The high peak in the graph above demonstrates that prior to the housing crisis, credit was considerably simpler to obtain, and loan criteria were not stringent. Credit was easily available at the time, and the qualification criteria for a loan were low.
Lenders were accepting loans without always conducting a verification process to determine whether the applicant would be able to repay the amount. This meant that creditors were financing more borrowers who were more likely to default on their loans.
Today’s Loans Are Much Tougher To Get than Before
As mentioned, lending standards have changed a lot since then. Bankrate describes the difference:
“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”
Looking back at the graph, you'll observe that after the high around the time of the housing meltdown, the line indicating the index dropped drastically and has been low ever since. In fact, the line is far lower than it was even in 2004 - and it's getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:
“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”
The decreasing index suggests standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.
Prior to the housing catastrophe, banking standards were significantly less stringent, and there wasn't much done to determine whether a borrower could repay their loan. Today, the restrictions are tougher, and both lenders and borrowers face less risk. This demonstrates that these two housing markets are highly different, and that this market is not the same as the previous one.