PROJECTHousing Credit Availability Index

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    The Housing Credit Availability Index (HCAI), developed in 2014, was based on a certain understanding of how the mortgage market behaved (explained in this brief). COVID-19 has shaken many norms, and the resulting economic crisis has sent ripples through the mortgage market that have significantly changed lending composition. 

    A significant shrinkage of the portfolio and private-label securitization (PP) channel has increased the market share for the FVR (Federal Housing Administration, Veterans Administration, and Rural Housing and Development) channel. Because loans in the PP channel currently have a materially lower default risk than loans in the FVR channel, the original methodology for calculating the HCAI currently shows an expansion in credit, which is not consistent with market realities. Accordingly, we have updated the methodology as of October 2020.

    The methodology below describes the changes we have made to improve the HCAI.

    Credit Risks and Market Share of the Three Channels

    The HCAI estimates the amount of risk lenders have taken on in the whole mortgage market by combining and weighting the risk in three channels: the government-sponsored enterprise (GSE) channel, the FVR channel, and the PP channel. Figure 1 shows the credit risk for each channel. The risk in the PP market has been much lower than the risk in the FVR channel since the 2008 financial crisis. For example, in the second quarter of 2020 (Q2 2020), the average default risk for the PP channel is 2.7 percent, compared with 3.0 percent for the GSE channel and 10.8 percent for the FVR channel. 

    Figure 1 Credit Risk of Three Channels over Time

    Figure 2 shows the change in market share for the three channels. Because of COVID-19, the PP channel has given up a material amount of market share, dropping from 28 percent in Q4 2019, to 24 percent in Q1 2020, to just 11 percent in Q2 2020.

    Figure 2 Change in Market Share for Three Channels

    An Updated Market Share Calculation Method

    When the market share of the loans with tight credit drops by more than 50 percent, even if there is no change in the other two channels, it will appear as though credit has loosened overall in the market, because a higher share of loans are now originated in channels that have easier access to credit. We know, however, that access to credit has been tightening in the dominant agency market, meaning that access to credit has tightened, rather than eased, for more borrowers, a fact that should be reflected in the overall HCAI.

    To deemphasize the importance of sharp changes in market share, we adopted a new weighting formula and used a four-quarter moving average to calculate the most recent quarter’s market share for each channel. Figure 3 shows that this new approach adapts to market changes more gradually and deciphers market changes from credit changes.

    Figure 3 PP Market Share under the Old and New Methodologies

    The new HCAI indexes are shown in figure 4 alongside the original HCAI indexes. The dotted line represents the difference between the two indexes. That is, the dotted line represents the impact of changes in market structure, which we deemphasize by subtracting them out. The first half of 2020 shows a significant change in market structure caused by the composition shift. The new HCAI shows that overall credit availability is tightening, as indicated by the new methodology line.

    Figure 4 Total Market Risk Comparison

    Research Areas Housing finance
    Policy Centers Housing Finance Policy Center