Lending Standards Are Not Like They Were Leading Up to the Crash You may be fretted we & rsquo; re heading for a real estate crash, however there are many reasons that this real estate market isn & rsquo; t like the one we sawin 2008. One of which is how lending standards are different today. Here & rsquo; s a look at the information to help prove it. Monthly, the Mortgage Bankers Association(MBA)launches the Mortgage Credit Availability Index(MCAI). According to their site: & ldquo; The MCAI provides the only standardized quantitative index that is entirely focused on mortgage credit. The MCAI is ... a summary measure which suggests the accessibility of home loan credit at a time. & rdquo; Basically, the index determines how simple it is to get
a mortgage. Have a look at the chart listed below of the MCAI considering that they began monitoring this information in 2004. It shows how lending“standards have changed over time. It works like this: When providing requirements are less rigorous, it & rsquo; s much easier to get a mortgage, and the index (the green line in the graph)is higher. When providing requirements are more stringent, 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. However, by 2006, it had increased to over 850. Today, the story is quite different. Because the crash, the index decreased because providing requirements got tighter, so today it’& rsquo; s harder to get a home mortgage.
Loose Lending Standards Contributed to the Housing Bubble
One of the primary aspects that contributed to the housing bubble was that lending requirements were a lot less stringent back then. Realtor.com discusses it like this:“& ldquo; In the early 2000s, it wasn’& rsquo; t exactly tough to snag a home mortgage... lots of mortgages were doled out to people who lied about their earnings and employment, and couldn’& rsquo; t actually pay for homeownership.”& rdquo; The tall peak in the graph above indicates that leading up to the real estate crisis, it was much simpler to get credit, and the requirements for getting a loan were far from rigorous. At that time, credit was extensively offered, and the limit for getting approved for a loan was low.
Lenders were authorizing loans without always going through a confirmation procedure to verify if the borrower would likely have the ability to repay the loan. That means lenders were lending to more borrowers who had a higher threat of defaulting on their loans.
Today’& rsquo; s Loans Are Much Tougher To Get than Before
As discussed, providing standards have changed a lot ever since. Bankrate describes the distinction:“& ldquo; Today, loan providers impose tough standards on customers –-- and those who are getting a home loan extremely 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 went down considerably and has remained low since. The line is far listed below where requirements were even in 2004 –-- and it’& rsquo; s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most current upgrade from May:
“& ldquo; Mortgage credit accessibility decreased for the third successive month ... With the decrease in schedule, the MCAI is now at its lowest level since January 2013.”& rdquo; The reducing index suggests standards are getting much tougher –-- that makes it clear we’& rsquo; re far away from the extreme financing practices that added to the crash.
