It was so hard to get a mortgage in 2015 that lenders failed to make about 1.1 million mortgages that they would have made if reasonable lending standards had been in place. From 2009 to 2014, lenders failed to make about 5.2 million mortgages thanks to overly tight credit. In total, lenders would have issued 6.3 million additional mortgages between 2009 and 2015 if lending standards had been more reasonable.
Since the 2008 housing crisis, borrowers with less than stellar credit have found it hard to obtain a mortgage. Accordingly, the number of mortgages taken out to buy a home declined from 4.6 million in 2001 to 3.5 million in 2015. The reasons for this exceptionally tight credit include
- the “overlays,” or additional restrictions lenders put on borrowing because of concerns that they will be forced to repurchase failed loans from the government-sponsored enterprises or Federal Housing Administration (FHA);
- the high cost of servicing delinquent loans; and
- the concern about potential litigation for imperfect loans.
While the tight credit box persists to the frustration of borrowers, lenders, and policymakers, there has been modest progress. The (Federal Housing Finance Agency) has taken many steps to address overlays, and the FHA (Federal Housing Administration) has taken some, but far fewer, steps. Nevertheless, this latest figure supports the urgency of continuing regulatory and other reforms that will make mortgages more accessible to all creditworthy borrowers.
1.1 million missing loans in 2015
We calculated what mortgage originations would have been if borrowers of all credit levels had the same access to the mortgage market in 2015 as they did in 2001. Table 1 shows that from 2001 to 2015, the number of new-purchase borrowers with FICO scores above 700 dropped 1.4 percent from 2.35 million to 2.32 million. The number of new-purchase borrowers declined by 20 percent for borrowers with scores from 660 to 700 and 65 percent for borrowers with scores below 660.
We use this information to calculate the “missing loans.” We believe the above-700 bucket was unconstrained by credit availability with a contraction of just 1.4 percent. We assume that if credit availability were not an issue, the other two buckets would have experienced the same 1.4 percent contraction. With a 1.4 percent contraction, the volume of the below-660 bucket would have been 1.4 million rather than 503,000, indicating that roughly 911,000 loans went missing. With a 1.4 percent contraction, the volume of the 660-to-700 bucket would have been 849,000 rather than 686,000, indicating that roughly 163,000 loans went missing. The tight credit environment resulted in approximately 1.1 million missing loans in 2015.
Tight credit has fueled an increase in cash sales
In 2001, there were 5.8 million new and existing home sales (figure 1). Total home sales increased to 8.2 million by 2005, declined sharply to 4.2 million by 2011, and slowly increased to 5.6 million in 2015. Despite the roller coaster ride, home sales are now only 4 percent lower than they were in 2001.
In contrast, the number of mortgages is down dramatically since 2001. There were 3.5 million first-lien purchase mortgages in 2015, down 32 percent from the 4.7 million purchase mortgages taken out in 2001. With home sales down only modestly but mortgage activity down dramatically, cash sales made up the difference. Their share increased from 18 percent in 2001 to 39 percent in 2012 and was down to 33 percent in 2015. Many of these cash buyers are investors, a situation the tight credit box has encouraged. In a tight credit environment, sellers often take the cash bid to avoid the delay and uncertainty of waiting to hear if a mortgage application has been approved.
More higher-credit borrowers, fewer lower-credit borrowers
The rise in the cash-sales share comes from limited credit availability and lower demand for homes. Figure 2 shows how tight credit has become and how many fewer borrowers there are with decent but lower credit (i.e., a FICO score below 660). Against a backdrop of a declining loan count, the share of borrowers with FICO scores below 660 declined from 31 percent to 14 percent from 2001 to 2015, and borrowers with FICO scores between 660 and 700 remained around 19 percent. Meanwhile the share of borrowers with FICO scores above 700 increased from 51 percent to 66 percent.
These missing loans don’t just mean 1.1 million families are deprived of sharing in the critical wealth-building opportunity of homeownership. Fewer home sales also mean fewer construction jobs and lower sales of consumer goods that homebuyers purchase when they move into their new residence. Ultimately, this loss slows the entire US economy.
Recent FHFA and FHA policy adjustments have helped modestly expand the credit box, but this newest update reveals that there is still much to be done. The impact of this tight credit environment will reverberate for years to come. Additional action, which we have discussed in detail, is needed to slow this damage.