Mortgage credit availability inches higher following 2020’s steep decline

The Mortgage Credit Availability Index (MCAI) increased 0.7% in November 2020, as reported by the Mortgage Bankers Association (MBA). This index figure is over 30% below pre-pandemic levels.

While the 30% drop in access to mortgaged credit experienced in 2020 is significant, the decline in mortgage availability heading into the 2008 recession was exponentially steeper than what occurred during spring 2020. That’s because access to credit was extremely loose during the Millennium Boom, when qualifying for a mortgage was as easy as signing on the dotted line. At the height of the Boom in 2006, mortgage credit availability was roughly five times greater than at the outset of the 2020 recession.

In the years that followed the last housing bust, qualifying standards were re-examined and the ability to repay rules were put in place. As mortgage qualifying standards have remained tight over the past decade, the MCAI doesn’t have far to fall in comparison.

Still, given the millions of jobs lost during this 2020 recession, mortgage lenders are being more cautious about who they approve for a mortgage-financed purchase or refinance in 2020. The MBA cites the most tightening of credit occurring for first-time homebuyers and borrowers of Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs (VA)-guaranteed mortgages. Closely related, FHA-insured and VA-guaranteed loans are also seeing the highest levels of default during this recession.

Lenders send mixed signals

Mortgage interest rates have continued to fall in 2020, now at historic lows. With the interest rate decrease alone, buyers today are able to qualify to purchase a home at a price 10% higher than a year earlier. This increase in buyer purchasing power has enticed potential homebuyers and caused home values to jump, despite the recession.

Still, lenders have only made it more difficult to apply and qualify for these amazingly low rates, requiring more documentation and higher credit scores. Financial experts also reference the unique financial situation many would-be borrowers find themselves in during 2020. For instance, individual stimulus payments and the temporary halt to student loan payments have given households a temporary boost to their spending power. But lenders need to weigh whether, without those bonuses, borrowers will still have the ability to pay in the years ahead.

Further, while home values have continued to rise throughout 2020, lenders are also weighing the likelihood that today’s elevated home values will soon fall.

For example, Wells Fargo and Chase have temporarily stopped granting home equity lines of credit (HELOCs), citing “economic uncertainty.”

A HELOC is a mortgage giving a homeowner access to draw on their home’s equity as needed, like a personal ATM. During the draw period, during which the homeowner may withdraw their HELOC funds, HELOC payments are limited to interest — no principal is repaid. Once the draw period ends, the HELOC resets and the homeowner’s payments increase to include interest and principal, or in some cases a final balloon payment.

The interest rate on a HELOC is variable and adjusts upward with its benchmark index rate. Since the draw period is typically ten years, lenders are unwilling to bet that far into the housing market’s future, let alone bet on the financial state of individual households as we continue to slog through the 2020 recession.

However, refinancers have had an easier time qualifying than other borrowers. In fact, refinances made up well over half of all mortgage originations throughout 2020, according to MBA data. Refinances present a lower risk for lenders and Fannie Mae and Freddie Mac, which by and large already hold these mortgages on their balance sheets. Further, these refinances offer lower payments or better mortgage terms for homeowners, which is only helpful in reducing the chances of future default.

Expect narrow access to mortgage credit to continue through 2021 and into 2022. Lenders will remain cautious until the majority of jobs lost to the 2020 recession are regained, the coming wave of foreclosures is behind us and a sustained economic recovery is underway.

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