How Home Loans Have Changed Since The Past

With what we’ve been seeing in the housing market recently, it’s only normal to think the industry may go back to the riskier habits and borrowing options that were directly responsible for the housing crash in 2008. 

Today, we’re helping to put those worries to rest by looking at what the numbers actually say.

The Mortgage Credit Availability Index (MCAI) is released by the Mortgage Bankers Association (MBA) several times a year. This is what it aims to do:

“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.”

In non-industry terms, the index is designed to reveal the ease or the difficulty of obtaining a mortgage. As the index goes higher, mortgage credit becomes more available. Take a look at the MCAI graph with data back to 2004, when such data was first available:

a line graph shows historic data for the mortgage credit availability index

What’s revealed in the above graph is the precarious time leading up to 2008, when the index crept above 400. The housing market heated up, leading the index to hit nearly 900 in 2006. It topped out at 868.7, which you can have likely identified as the housing bubble.

Then, the market crashed. The MCAI crashed with it as mortgage money became even more difficult to secure. Since that point, the easing of certain lending standards has helped that availability. Overall, though, the index is still low. In April of this year, it was at 121.1, close to what it was in June after the crash, and about one-seventh of its all-time high.

What Caused The Index To Spike So High During The Housing Bubble?

It was the surprisingly weak lending standards that led first to loans being widely available and then, ultimately, to the market’s collapse. By 2006, the demand was reaching a point that mortgage lenders had started to offer loans that were not putting much (if any) emphasis on the borrower’s eligibility. Fundamental steps were being overlooked, like having borrower’s undergoing a verification process to make sure they would be able to repay the loan. Instead, lenders simply approved the loans.

Wondering what that relaxed lending might look like? One example that played a big part of the housing crash involved the FICO credit score associated with a loan. This is how myFICO explains a FICO® score:

“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.”

When the housing market was heating up, borrowers with FICO scores under 620 could get mortgages written for them. Though some loan programs do still exist for 620 scores, today’s lending standards are much more controlled. 

Given the ramifications of a housing bubble, lending institutions are scrutinizing applicants more thoroughly to measure the real risk involved before approving loans. According to the New York Federal Reserve’s most recent Household Debt and Credit Report, the first quarter of 2022 saw a 776 median score on all mortgage loans.

a bar graph shows volume of loads in billions with credit score less than 620

Now, let’s put that into perspective. In 2006, $376 billion in loans were given out to buyers with scores under 620.

In 2021, only $80 billion in loans were given out to that group. And in 2022, we’re keeping that pace with just $20 billion in the first quarter.

Takeaways For Borrowers In Today’s Market

Though today’s housing market can seem to have parallels to the ones of the past, there are fundamental differences. Lending standards in 2006 were far too relaxed with far little evaluation being done to evaluate the risk of a borrower.

Now, standards are tighter. That reduces the risk involved for both lenders and borrowers. The numbers bear this out, meaning that we are living through a very different housing market than what we experienced in the 2000s.