In the early 2000s, getting a mortgage was hardly difficult thanks in great part to lax lending standards. This practice eventually resulted in a bubble forming within the nation’s housing market – which, we are all aware, subsequently burst.
Ever since then, the pendulum has swung the other way – to an extreme. Today, lenders require nothing short of pristine credit to obtain a mortgage. We can never go back to the reckless lending policies of the past, but we believe they’ve gone too far, and it concerns us.
Do you have ‘average’ credit? If you do, getting a mortgage may be tough
What will your credit rating allow you to get?
We took a look at data generated by the Federal Reserve and was shocked by what we saw. Of the $426.6 billion in mortgage origination’s during the second quarter of this year, almost 62% went to households with a credit standing of 760 and up.
Borrowers with a credit rating within the range of 620 to 659, which many lenders view as below-prime credit, received just 6.3% of the dollar volume of mortgages in the second quarter.
Now, if we compare that with the same quarter of 2004, the group with 760-or-higher credit received 23.5% of the mortgages, and the 620-to-659 borrowers received 8%.
Although surveys say credit is loosening for some kinds of loans, standards are still far tighter than necessary.
Too risk-averse?
The information raises questions regarding whether regulators and banks have become too risk-averse. It’s also possible that borrowers without prime credit have recently given up owning a home for now.
Figures from property-data provider CoreLogic demonstrate that home-purchase mortgage applications from borrowers with fico scores below 640 fell to 6% in 2015, from 29% in 2005. To put it differently, lower-rated borrowers aren’t even applying.
But why?
Rising home values might simply be putting property unattainable for a lot of lower-income people.
As an example, prices in Seattle are up 55% from their 2012 post-crisis low, according to the Case-Shiller Index. Nationally, prices are up 35% from their 2012 low.
Higher prices require larger down payments and bigger payments, particularly for borrowers with lower credit ratings.
But just as culpable as rising home prices are homeowners who went through a foreclosure between 2004 and 2015.
Of these 7 million homeowners, only 7.3 % have obtained a mortgage again, and 69% still have a foreclosure on their credit history, thus precluding them from buying again.
The market is making it remarkably challenging for many families to purchase a house.
We would never propose that we consider going back to the “old days” of sub-prime lending, but realizing that there are a great number of families who would like to buy – and who meet acceptable standards for risk – should give lenders some pause for thought.