Increased access to government-insured mortgages

Dwindling inventory and too-high home prices are on the minds of many California real estate professionals in 2016. But do we need to worry about fewer qualified homebuyers, too?

The average credit score of mortgage applicants gaining approval is approaching 750, according to CoreLogic. Today’s very high score is up from the more attainable average score of 690 seen in 2001, before the Millennium Boom dropped average credit scores into the basement.

There’s some good news for homebuyers, as it turns out it’s becoming easier to qualify for some types of mortgages compared to others.

The Mortgage Bankers’ Association’s (MBA’s) Mortgage Credit Availability Index reported conventional mortgage credit decreased 1.6% in March 2016 from the previous month. At the same time, access to government-backed mortgages loosened 0.9% from the previous month, continuing a long upward trend in looser government lending standards and easier homebuyer access to mortgages.

Why credit is so tight

Government-issued mortgage access bottomed at the end of 2012, when it was most difficult to qualify for a mortgage. It has since increased steadily, evidenced by the increased share of Federal Housing Administration (FHA)- insured mortgages as it becomes easier to qualify for government-issued mortgages and more difficult to qualify for conventional mortgages.

Access to conventional mortgage credit increased from its March 2012 bottom, peaking in October 2015. However, it has declined each month since. Why?

It’s possible today’s tightening of mortgage credit is preemptive, as lenders have shown other signs of caution about 2016’s economy and housing market.

Most significant for homebuyers, the spread between the 10-year Treasury note and average fixed rate mortgage (FRM) rate is unreasonably high for an expanding economy. This spread was 1.92 percentage points in mid-April, much higher than the historically applicable 1.5-point spread. Thus, homebuyers are paying higher interest rates than they need to. The most likely reason lenders are requiring a higher spread is that they are concerned about the global economy causing havoc here at home.

In turn, lenders may see tightening credit to only the most qualified homebuyers as another way for them to insure themselves against future defaults if the economy takes a turn for the worse. This is little comfort to the non-qualifying homebuyer.

Can homebuyers expect FHA-insured mortgages to likewise become more difficult to qualify for?

It’s possible, as mortgage access to government-backed mortgages bottomed about eight months after access to conventional mortgages did back in 2012. Government-backed mortgage access may also peak in the coming months.

On the other hand, access to conventional mortgage also tends to be more volatile than access to government mortgages. Therefore, the dip experienced since November 2015 may turn out to be a blip. Stay tuned to find out if the trend continues — and if it does, expect it to spread to government-backed mortgages, too.