Lending Standards Are Not Like They Were Leading Up to the Crash You might be worried we & rsquo; re heading for a real estate crash, but there are numerous factors why this real estate market isn & rsquo; t like the one we sawin 2008. One of which is how financing requirements are different today. Here & rsquo; s a look at the information to assist prove it. Each month, the Mortgage Bankers Association(MBA)launches the Mortgage Credit Availability Index(MCAI). According to their website: & ldquo; The MCAI offers the only standardized quantitative index that is exclusively focused on mortgage credit. The MCAI is ... a summary measure which indicates the availability of mortgage credit at a point in time. & rdquo; Basically, the index determines how easy it is to get
a home loan. Have a look at the graph listed below of the MCAI since they began monitoring this information in 2004. It shows how lending“requirements have actually altered in time. It works like this: When lending standards are less rigorous, it & rsquo; s much easier to get a home mortgage, and the index (the green line in the graph)is greater. When providing requirements are stricter, it& rsquo; s more difficult to get a home mortgage, and the line representing the index is lower. In 2004, the index was around 400. By 2006, it had actually gone up to over 850. Today, the story is quite different. Since the crash, the index went down because providing standards got tighter, so today it’& rsquo; s more difficult to get a home mortgage.
Loose Lending Standards Contributed to the Housing Bubble
One of the primary aspects that contributed to the real estate bubble was that financing requirements were a lot less stringent back then. Realtor.com explains it like this:“& ldquo; In the early 2000s, it wasn’& rsquo; t precisely difficult to snag a home mortgage... lots of mortgages were doled out to individuals who lied about their earnings and work, and couldn’& rsquo; t really afford homeownership.”& rdquo; The high peak in the graph above suggests that leading up to the real estate crisis, it was a lot easier to get credit, and the requirements for getting a loan were far from rigorous. Back then, credit was extensively offered, and the threshold for getting approved for a loan was low.
Lenders were approving loans without constantly going through a confirmation procedure to confirm if the customer would likely be able to pay back the loan. That implies creditors were lending to more debtors who had a higher threat of defaulting on their loans.
Today’& rsquo; s Loans Are Much Tougher To Get than Before
As discussed, providing requirements have altered a lot ever since. Bankrate describes the distinction:“& ldquo; Today, lending institutions enforce tough standards on customers –-- and those who are getting a mortgage overwhelmingly have excellent credit.”& rdquo; If you recall at the graph, you’& rsquo; ll notification after the peak around the time of the housing crash, the line representing the index decreased dramatically and has stayed low because. The line is far below where requirements were even in 2004 –-- and it’& rsquo; s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, offers the most recent upgrade from May:
“& ldquo; Mortgage credit accessibility reduced for the 3rd successive month ... With the decline in availability, the MCAI is now at its least expensive level since January 2013.”& rdquo; The reducing index recommends requirements are getting much tougher –-- which makes it clear we’& rsquo; re far from the severe financing practices that contributed to the crash.
