Mortgage credit made available through government-agency programs has loosened significantly, according to the leading tracking data. The Federal Housing Administration (FHA) loan program, in particular, has seen rising borrower debt loads, ultra-low down payments and falling credit scores, according to multiple tracking agencies. Some say credit is now too loose for borrowers on the margins.
The Mortgage Bankers Association’s (MBA's) credit availability index has generally increased at a slow and steady pace since it was benchmarked in 2012 at 100 during one of the tightest times for mortgage credit.
It now stands at the level of 180, but that is far below the peak of 870 that it reached just before the housing market crashed a little over decade ago. MBA’s index takes into account the mix of loan products available to borrowers and credit standards, such as the allowed debt loads and tolerances for low down payments.
The index, though, is relatively new. MBA can draw on data back to 2004, a period where the market was already starting to overheat and the index was moving close to 400. Joel Kan, associate vice president of industry surveys and forecasting, said there isn’t quite enough information yet to peg where “normal” lies on the graph.
“Credit is about 80 percent more available, but that is relative to how tight it was in 2012,” Kan said. “Again, we are still about a fifth of where we were at the height of things. So, I would say, we are still in unchartered waters because even the economic and home-price environment is different too. So, if you combine all these factors together, there isn’t really a good way to say normal anymore.”
Kan said that the credit loosening has primarily occurred at the two ends of the market. Credit has eased for fairly safe jumbo loans taken out by wealthy borrowers with good credit. These are typically held by banks in portfolio. On the other end of the spectrum, the FICO credit scores have fallen for FHA loans, and borrower debt loads have increased relative to their incomes.
“Part of that is due to lenders removing some of these credit overlays, given how good the economy is, how good the job market is, but also to help some of these borrowers who are facing affordability challenges,” Kan said. The FHA loosening has introduced additional risk in the market.
“Whether or not the job market and the much better equity position that a lot of these borrowers are in, whether that helps to smooth some of this, I guess we will see over the next two years or next few quarters,” Kan said. “Typically, that will help.”
Last week, the Urban Institute released its latest read on how much default risk the market is tolerating. It pegged the overall market default risk at 5.7 percent as of the second quarter (an estimate of the percentage of loans that would go unpaid for more than 90 days). This was still below half the risk being taken during the 2001-2003 era. Its tracking over time suggest that credit risk has only moderately increased since credit began to loosen in 2013. This is primarily because there are few risky product features in mortgages today.
The total default risk in the government-loan channel, however, has risen from a low of 9.6 percent in 2013 to 11.8 percent, the highest level since 2009, the Urban Institute said. That remained about half the default risk during the bubble era, however.
The American Enterprise Institute's Center on Housing Markets and Finance, however, has consistently sounded alarm bells about loosening standards, particularly in the FHA program. AEI estimated that 28 percent of FHA loans would default in a severe downturn, up from roughly 21 percent in 2012. During conferences this month, FHA Commissioner Brian Montgomery indicated that the agency was analyzing borrower debt loads and other risk factors in FHA forward loans.
The percentage of FHA borrowers who need to use 50 percent or more of their income to cover their debts has been on the rise, said Ed Pinto, the center's co-director. Another risk factor is that borrowers are more commonly using down payment assistance to meet the FHA's minimum 3.5 percent down payment requirement.
A third problem area is that the FHA share of the cash-out refinance market has increased. FHA borrowers are pulling out up to 85 percent of the home's value.
"We think their cash-out requirements are way too broad," Pinto said. "It makes the house almost into an ATM, [and] we know the kinds of problems that occur from that.
"It generally doesn’t do borrowers any good to have them to continue to pull out their equity many times just to pay off credit cards and other things that have nothing to do with the housing," Pinto added.