Mortgage Credit: Loose, Tight, or Just Right?

Earlier this year the Mortgage Bankers Association (MBA) began releasing its Mortgage Credit Availability Index, a measure of how "loose" or "tight" mortgage credit is when compared to the previous month or year.  In an article on CoreLogic's Insights blog, titled "Goldilocks and the Three Credit Bears," senior economist Mark Fleming describes his company's similar index.

The Housing Credit Index (HCI) measures the range and variation of mortgage credit over time and over various underwriting criteria including credit scores, debt-to-income and loan-to-value ratios and loan attributes such as whether the loan is a fixed or adjustable rate, the amount of documentation, and the loan origination channel.  CoreLogic then uses what Fleming calls "mathematical techniques popularized in the economic inflation forecasting literature to handle multiple correlated attributes."

The index, he says, can be thought of as measuring the size of the "credit box," although "in this case the box is a multivariate correlated distribution."   Like the MBA index, a rising HCI indicates increasing availability or looseness of credit and a declining index indicates it is tightening.   CoreLogic's index is benchmarked to January 1998, which Fleming calls the most recent period of relative normality in the housing market.  Changes in the index can be thought of a shares or percentages so an increase from 100 to 200 means credit is twice as loose as in the base period.

Fleming explains that such an index is valuable because lack of access to credit has been cited as a reason for the slow pace of the housing recovery.  He points to the Federal Reserve's Senior Loan Officer Survey which is often cited as a source but is really only a superficial look at whether banks are tightening or loosening their requirements and says little about the overall availability of credit.  Further he says, saying that credit is tight or it is loose implies that somewhere there is, like Goldilocks thought in another context, an amount of credit that is just right.

So where is credit on the too loose, too tight, or just right spectrum?  The chart shows the HCI from 1998 to early this year along the left axis and the serious delinquency rates over that period on the right axis.  When credit availability expanded in the early years of this century the delinquency rate rose from 1 to 1.25 percent.  Credit access fell again then rose in mid-decade to nearly double the normal (1998) level with disastrous results, a delinquency rate that shot to nearly 9 percent.  This was followed by a quick and dramatic contraction to its tightest point in the late 2010 at only one-third the "normal" level; Fleming says this was too tight.  Since then the HCI has eased in fits and starts with modification and refinance programs designed to help struggling homeowners.  While the index has risen recently, credit remains tight by historic standards.

Fleming concludes that like Goldilocks testing every bed, "Over the last 15 years we have tried too loose and too tight credit with varying degrees of success. Consider lending standards in the late 1990s when the 'credit box' was twice the current size and the serious delinquency rate was only 1 percent. That bed feels just right."