Why Home Loans Today Aren't What They Were In The Past

In today's housing market, many are beginning to wonder if we're returning to the riskier lending habits and borrowing options that led to the housing crash 15 years ago. Let's ease those concerns. Several times a year, the Mortgage Bankers Association releases an index titled the Mortgage Credit Availability Index. Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. As the graph shows, the index stood at about 400 in 2004. Mortgage credit became more available as the housing market heated up. And then the index passed 850 in 2006.

When the real estate market crashed, mortgages became impossible to secure. Thankfully, lending standards had eased somewhat since then but the index is still low. In April of 2022, the index was at 121, which was about 1/7 of what it was in 2006. To keep up with demand in 2006, many mortgage lenders had extremely weak lending standards and offered loans that put little emphasis on the eligibility of the borrowers. Buyers were doing things like stated income loans, also called liar loans, where they could just say they made any amount of income to qualify for the home that they wanted. And the mortgage company would never check or verify that.

During the housing boom, many mortgages written for borrowers with credit scores under 620, while there are still some loan programs that do allow for a 620 score, those buyers have to go through much stricter requirements to get the loan. In the first quarter of 2022, the median credit score on all mortgage loans was 776. In 2006, buyers with a score of under 620 received $376 billion worth of mortgages. In 2021, that number was only 80 billion and it's only 20 billion in the first quarter of 2022.

So, it's on pace to be the same as it was last year. They're not increasing the availability of credit for subprime borrowers. As you can see, lending standards were much more relaxed back before the crash with little evaluation done to measure a borrower's potential to repay the loan. Today, standards are much tighter and the risk is reduced for both lenders and borrowers. These are two very different housing markets and today is nothing like the last time.