It is almost a given that the mortgage
market will be smaller this year than last so discussions have turned to the
availability of mortgage credit and whether it is too tight. Mark Fleming, chief economist at CoreLogic, says
that the question of availability has taken on more importance as the Qualified
Mortgage (QM) standard is implemented and the industry has to determine the types
of credit it will offer to borrowers. He
presents a different take on the subject in the current issue of the company's Marketpulse.
Whether credit is too tight or too
loose, he says, is an especially difficult question to answer because there is
no single measure of its availability. However
there are a variety of metrics that collectively influence that access; credit
worthiness, loan-to-value and debt-to-income ratios, the level of documentation,
the availability of adjustable rate loans, and the share of purchase loans.
Fleming set out to measure the current
limits on these measures by determining what constitutes a "normal" level of
availability for each metric. To do this
he settled on the year preceding an announcement by the Federal Reserve in
February 2004 encouraging the use of adjustable rate mortgages and its subsequent
raising of the federal funds rate as baseline period for his demonstration and
looked at averages for the metrics during that period. For example, over that year the average
credit score for all first lien purchase loans was 710. In October 2013 it was 749.
While this is only a 5 percent difference,
he points out that the share of loans with credit scores below 620 was 29
percent over the baseline period and was 0.3 percent in October 2013. "It is much more insightful to compare the
share of the riskiest subset of the entire measure's distribution to that same
share before the housing bubble," he says.
"Credit availability in each metric represents the extent to which
lenders originate loans to the riskier subset of the distribution."
Fleming constructed the figure below with
each axis representing a different measure of credit availability and the inner
(blue) hexagon crossing each axis at the value of 100 which represents the
normal value for that metric based on the average during the year preceding the
Fed's 2004 announcement. The outer
(green) hexagon represents the deviation from normal at the loosest point
during the housing bubble. Red
represents the conditions in October 2013.
Going back to the example of credit
scores, the share of first lien purchase mortgages with scores below 620 was 29
percent during that year and that is indexed to 100. The October 2013 origination of mortgages
with scores that low was virtually zero (0.3 percent).
Fleming says that what is immediately
apparent is the credit availability is tight for two important underwriting
criteria, credit scores and low documentation levels, neither of which are
being originated relative to either the height of the expansion of credit or
the normalized level of availability.
Underwriting eligibility in the current market requires both good credit
and the ability to fully document loans.
However the shares of high LTV and high-DTI lender are currently close
to normal. Both had expanded availability
during the housing boom and high LTV lending remains modestly loose relative to
normal while high DTI lending is modestly tight. ARM loans are much more restricted than
normal "as many subprime ARM loan products are no longer available."
Fleming says that looking at the
riskiest subset of an entire measure's distribution and comparing it to the
share in a more typical time gives more insight into whether credit is too
loose or too tight. Currently credit is
tight for low credit score borrowers, those who can't or don't want to document
their loans, and those who want an ARM product.
"For many, the choice to document or select an ARM product is not necessarily
an impediment to credit availability," he says.
"However, for those with low credit scores there are fewer options."