How New Mortgage Standards are Helping to Stabilize the Market
Real estate is shifting to a more normal market; the days of national home appreciation topping 6% annually are ending and inventories are increasing, which is causing bidding wars to almost disappear. Some see these as signs that the market will soon come tumbling down as it did in 2008. I disagree.
As it becomes easier for buyers to obtain mortgages, many are suggesting that this is definite proof that banks are repeating the same mistakes they made a decade ago. But it’s not.
Each month, the Mortgage Bankers’ Association (MBA) releases a measurement which indicates the availability of mortgage credit known as the Mortgage Credit Availability Index (MCAI). According to the MBA:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.).” *
The higher the measurement, the easier it is to get a mortgage. During the buildup to the last housing bubble, the measurement sat at around 400. In 2005 and 2006, the measurement more than doubled to over 800 (!!!). When the market crashed in 2008, the index fell to just over 100.
Over the last decade, as credit began to ease, the index increased to where it is today at 186.7 – still less than half of what it was prior to the buildup of the last decade and less than one-quarter of where it was during the bubble.
Here is a graph depicting this information (remember, the higher the index, the easier it was to get a mortgage):
The incredibly loose lending standards that led to the housing crash created a false demand for homes – buyers that should not have qualified were competing with those that legitimately qualified. This put a strain on supply, which naturally increased prices.
After the crash, lending standards became very strict. Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis ten years ago.
*For more information on the MCAI, including methodology, FAQs, and other helpful resources, please clickhere.