One of the great debates of our time -- at least in the mortgage world -- has been the question of credit access. Is credit too tight, too loose or just right?
Easy Isn't Always a Good Thing
Surely greater mortgage availability is a universally good thing, something we can all agree on, right? Well, actually, no. It turns out that if the lending process is too easy, there can be dire results in the form of foreclosures and lower home values.
One way to look at the problem has been to follow the Mortgage Credit Availability Index (MCAI), a measure reported by the Mortgage Bankers Association. In March 2012, the base period, the index stood at 100, while in March 2014 the index reached 113.5, meaning it's a lot easier to get a mortgage than it was two years ago.
The catch is that in 2007 the index would have been at roughly 800. Does this mean anyone wants to go back to the go-go years of mortgage lending when loans were being given out like gum drops?
Mortgages and Credit Availability
Not hardly. What the index shows is that mortgage lending has entered a new era, a time when the need for credit is matched more closely by lender underwriting requirements.
The Mortgage Bankers Association has now come out with a much better way to measure credit availability.
First, they have developed a credit-availability chart which goes back on a monthly basis to March 2012. The higher the red line, the easier it is to get a mortgage.
Second, the MBA has an additional chart which looks at credit availability going back to 2004.
The second chart shows the ups-and-down of credit availability over a longer span. What we can see is a huge increase in loan availability between 2004 and 2006, a massive fall-off, and then fairly-consistent mortgage availability since 2008.
Does this mean 2006 and 2007 represented a golden era for mortgage finance?
Credit availability is one issue, but there are others as well. One reason loans were so easy to get in 2006 and 2007 is that many of the mortgage products marketed back then are not widely available today and with good reason: they didn't work for a lot of people. As examples, you don't see too many option ARMs, interest-only mortgages or no-doc loan applications under the new rules created by Dodd-Frank.
Mortgages and Credit
You also don't see too many new foreclosures today, and that's another measure of good lending.
The Mortgage Bankers Association reported in February that more than 90 percent of the distressed loans we see today have their roots in the not-so-golden age of instant and widespread mortgage availability.
"Loans originated in 2007 and earlier accounted for 75 percent of the seriously delinquent loans, while loans originated in 2008 and 2009 accounted for another 16 percent," according to MBA Chief Economist Michael Fratantoni.
The next time you hear people complaining about allegedly-tight mortgage standards, show them the charts. What we have today is a good balance between loan availability and the need to avoid excess risk, meaning that mortgage loans are fairly easy to get but not so easy that both borrowers and lenders will regret their choices.