Updated January 17, 2019
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The Housing Finance Policy Center’s latest credit availability index (HCAI) shows that mortgage credit availability declined slightly to 5.75 percent in the third quarter of 2018 (Q3 2018), down from the previous quarter (5.84 percent) and the peak reached in the first quarter of 2018 (5.89 percent). This quarter’s decline was caused by the continuing shift in market composition, as the government channel lost additional market share to the portfolio channel, which has much tighter lending standards. Credit continued to expand in the GSE channel, while the government channel saw a slight decline. In the portfolio channel, credit availability expanded, the first increase since the fourth quarter of 2017.
The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.
Mortgage credit availability in the GSE channel—Fannie Mae and Freddie Mac— has been increasing steadily since the financial crisis and, in Q3 2018, the index reached 3 percent for the first time since 2008. The government channel (FVR) dipped slightly, but remains near the highest level reached since 2009, achieved in the second quarter of 2018. The FVR channel includes the Federal Housing Administration, the US Department of Veterans Affairs, and the US Department of Agriculture’s Rural Development program. The portfolio and private-label securities channel continues to stay close to or at the record low for the amount of default risk taken.
Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.
We will publish an updated HCAI for Q4 2018 on April 12, 2019.
HCAI by Channels
The GSE market has expanded the credit box for borrowers more effectively than the FVR government channel has in recent years. The downward trend of credit availability in the GSE channel began a reversal in Q2 2011. From Q2 2011 to Q3 2018, the total risk taken by the GSE channel has more than doubled, from 1.4 percent to 3.0 percent.
The total default risk the government loan channel is willing to take bottomed out at 9.6 percent in Q3 2013. It has fluctuated at or above that number since then. In the past eight quarters starting in Q4 2016, the risk in the government channel has risen significantly from 9.9 to 11.7 percent, just off the highest level since 2009, but still about half the pre-bubble level of 19 – 23 percent.
Portfolio and Private-Label Securities Loans
The portfolio and private-label securities (PP) channel took on more product risk than the FVR and GSE channels during the bubble. After the crisis, the channel’s product and borrower risks dropped sharply. The numbers have stabilized since 2013, with product risk fluctuating below 0.6 percent and borrower risk around 2.0 percent. The PP channel took just over 0.1 percent product risk in Q3 2018. The total default risk taken by this market remains low at 2.4 percent in Q3 2018.