Is Mortgage Financing Really that Tight?

Allegedly "tight" mortgage credit availability sounds like a big problem for borrowers, or at least would be a problem if home loans were actually hard to get. In fact that isn't the case. This year millions of people will get new financing and refinancing.

For instance, in August the FHA received 97,300 loan applications. It also approved 97,713 loans for insurance. How is it possible that loan approvals were greater than the number of loan applications? The reason is that some loans received earlier in the year were approved in August and some August applications will not be approved or will be approved in September.

On balance, though, everyone gets the idea: Most loan applications are approved and they're approved on the first try.

Mortgage Credit Availability

So why the scary headlines?

It's not unreasonable for both borrowers and lenders to want a better understanding of the mortgage landscape. Everyone looks at such things as mortgage rates, FHA and VA financing, conventional loans and jumbo mortgages. To measure the availability of mortgage credit the Mortgage Bankers Association has created something called the Mortgage Credit Availability Index or MCAI.

"The MCAI simply measures the supply side of credit without examining the volume of credit provided by each investor," says the MBA. "The philosophy is that the index measures the types of loans available at each point in time, rather than the volume of lending that is being done."

In other words, with this definition more mortgage products equal more credit availability, even if certain products and practices from the past are largely banned today.

Fewer Mortgage Options

The MBA says "the main dimensions of mortgage credit risk taken into consideration are loan purpose (Purchase, Rate / Term Refinance, Cash-Out Refinance), amortization type (Fixed, ARM, Balloon), property type (primary residence, second home, investor property), loan term (years to maturity), LTV, credit score, documentation type (full, stated, no-doc) and payment type (interest-only vs. non)."

With this explanation it's easy to understand why credit availability is down; indeed, the MBA reports that the MCAI was at 110.2 in November versus roughly 800 in 2007.

But is lower mortgage credit availability a problem? Should we return to the standards of 2007?

First, no one with any common sense wants a re-run of the 2007 loan standards. Yes, a lot of "non-traditional" loan products were available back then but -- unfortunately -- many of them were bad for borrowers, lenders and bank shareholders because they produced an historic flood of foreclosures and reduced home values.

Second, given the MCAI definition of credit availability there's little wonder that the index is down. Under Wall Street Reform you can't have a qualified mortgage without a fully-documented loan application. That means no-doc loans have become as common as flying pigs. You can see this as "less" credit availability or you can say that the widespread use of no-doc loan applications was a really bad idea that lead to a lot of people losing their homes -- and a lot of lenders with smaller profits and no profits.

Third, also banned under the qualified mortgage standards are interest-only loans, balloon notes, and option ARMs. Again, under the new rules we have fewer product options and therefore "less" credit availability, but should we go back to the bad old days when so-called "affordability" loan options turned out so poorly for many borrowers, lenders and bank shareholders?

You can easily see that "reduced" credit availability -- at least as defined in terms of mortgage product options -- is actually an appealing idea. Just look at the six-month delinquency figures and you can see that fewer and better product options have actually resulted in fewer late payments.

Mortgage delinquencies are falling through the floor.

Reduced delinquencies suggest fewer foreclosures and that's exactly what we're seeing: RealtyTrac has just reported that November foreclosure levels were at the lowest levels in 95 months.

So is less "credit availability" a bad thing? Not hardly, except for those who think more delinquencies, foreclosures and lender losses are somehow good for the housing market.

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