Updated April 19, 2019
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The Housing Finance Policy Center’s latest credit availability index (HCAI) shows that mortgage credit availability increased to 5.85 percent in the fourth quarter of 2018 (Q4 2018), up from the previous quarter (5.75 percent), but still down from peak reached in the first quarter of 2018 (5.89 percent). This quarter’s increase was caused by an increase in risk taken in the portfolio and private-label securities channel. Credit also expanded in both the GSE and government channels, but by a smaller margin.
The HCAI measures the percentage of owner-occupied 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. Last quarter, Q3 2018, the index reached 3 percent for the first time since 2008, and this quarter, it continued to increase slightly. The government channel (FVR) increased to 11.8 percent, the highest level since 2009. 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 increased to 3.1 percent, but still remains near 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 Q1 2019 on July 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 Q4 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 nine quarters starting in Q4 2016, the risk in the government channel has risen significantly from 9.9 to 11.8 percent, 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. Borrower risk increased substantially in the fourth quarter of 2018, driven primarily a decline in FICO scores and an increase in high-LTV lending. Total risk in the PP channel was 3.1 percent in Q4 2018, the highest level since 2012.