The voices of Urban Institute's researchers and staff
April 2, 2015

Four million mortgage loans missing from 2009 to 2013 due to tight credit standards

For borrowers with anything less than pristine credit, it is hard to get a mortgage. In a new brief, we estimate that 4 million more loans would have been made between 2009 and 2013 if credit standards had been similar to 2001 levels.

Why is credit so tight?

Mortgage credit today is much tighter than it was at the peak of the housing bubble in 2005 and 2006, which is expected and appropriate. But it is also significantly tighter than it was in 2001, prior to the housing crisis. The factors contributing to the tight credit box are complex, ranging from the issue of lender overlays due to repurchase risk, to the high costs of servicing delinquent loans, to fears of litigation by the Department of Justice, the HUD Inspector General, or State Attorneys General.

A tight credit box has severe consequences. It means that fewer families will become homeowners at an opportune point in the housing market cycle, depriving these families of a critical wealth-building opportunity. It slows the housing market recovery by limiting the pool of potential borrowers. Ultimately, excessively tight credit hinders the economy, as it slows all the associated economic activity that comes with home buying, such as furniture purchases, landscaping, and renovations.

Low to moderate credit borrowers are getting boxed out of mortgage lending

When we estimated the number of missing loans from 2009 to 2013, we found that beyond just the 4 million missing loans overall, the number of loans missing had grown enormously each year, with over 1.2 million loans missing in 2013 alone. The increase reflects a mortgage market recovery that is largely limited to households with excellent credit. While high-credit households are now obtaining loans at a slightly lower rate than in 2001, lower credit borrowers are faring far worse (Table 1). While the number of loans to high-credit borrowers (those with a 720 FICO score or higher) is down only 8.9 percent from 2001, low-credit borrowers (those with a FICO score below 660) have dropped 75.8 percent, and moderate credit borrowers have dropped 37.0 percent. As a result of this tightening, high credit borrowers now make up the majority of new purchase loans, while low credit borrowers comprise only a tiny share relative to 2001 (Figure 1).

Why we need to improve credit availability Constrained credit availability has decreased the number of purchase mortgages being made in the current environment, especially for borrowers without pristine credit. Policymakers should strengthen ongoing efforts to improve credit access by 1) resolving the uncertainly surrounding agency repurchases, 2) evaluating why the costs of servicing delinquent loans are so high and 3) reassuring lenders that costly litigation does not lie behind every default. Broadening lending standards is critical for cultivating and sustaining a more robust recovery in the housing and mortgage markets.

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research.