Because lending standards have been ratcheted down so tightly since the beginning of the Great Recession, there have been roughly 4 million “missed” mortgage loans between 2009 and 2013, according to a recent study.
The Urban Institute, a policy research group, found that lending standards are tighter today than they were even before the housing boom. If lenders had moved back to their 2001 credit standards when the housing market crashed, there would have been a potential for an additional mortgage loans since then.
Taz George, a research associate with the Urban Institute says that borrowers’ FICO credit scores have become the biggest determining factor for mortgage qualification. The study reported that in 2013, less than 40 percent of borrowers getting home-purchase loans had FICO scores below 720. (FICO scores run from 300 to 850.) Compare that with 2001 when lending standards will still much more cautious than during the housing bubble. In 2001 more than 50 percent of borrowers had scores below 720.
“When you look at more moderate credit score borrowers, those with a FICO of between 660 and 720, that’s a score that in a year like 2001 we would consider eligible for a purchase mortgage, but today we see a 37 percent decline in the number of loans in that category,” George said.
The paranoia in mortgage credit standards stems from all the soured home loans big banks were forced to buy back as well as legislation after the financial crash that threatened to make banks keep a portion of all mortgages made on their books. The risk has outweighed the benefits of lending for several years now.
Americans are also in greater debt today than they were back in 2001. Student loans loom large for many potential first-time home buyers and credit card and auto debt have hit record highs lately.
As financial regulations have been more clearly defined recently and government agencies are trying to lower certain fees for lenders, perhaps 2015 will see credit loosen enough to keep the mortgage market recovering.