Today, some fear that the real estate market is beginning to look like it did in 2006, just before the housing crisis. One of the factors they are pointing out is the availability of money for mortgages. Recent articles about the availability of low down payment loans and down payment assistance programs are raising fears that we are returning to the bad habits seen 15 years ago. Let's alleviate those worries.
Several times a year, the Mortgage Bankers Association releases an index entitled The Mortgage Credit Availability Index (MCAI Credit Availability Index). According to their website:
"The MCAI provides the only standardized quantitative index that focuses exclusively on mortgage credit. The MCAI is ... a summary measure that indicates the availability of mortgage credit at a given point in time."
Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit we have in the market. Here is a graph of the MCAI dating back to 2004, when the data was first made available:
As we can see, the index was around 400 in 2004. Mortgage credit became more available as the housing market heated up, and then the index passed 850 in 2006. When the real estate market crashedThe same thing happened to the MCAI (down to less than 100), as mortgage money became almost impossible to secure. Fortunately, credit standards have eased a bit since then. The index, however, is still below 150, which is about one-sixth of what it was in 2006.
Why did the index spiral out of control during the housing bubble?
The main reason was the availability of loans with extremely poor credit standards. To keep up with demand in 2006, many mortgage lenders offered loans that placed little emphasis on borrower eligibility.
Lenders were approving loans without always going through a verification process to confirm that the borrower would probably be able to repay the loan.
Some of these loans offered attractive low interest rates that increased over time. The loans were popular because they could be obtained quickly and without the borrower having to provide advance documentation. However, as rates increased, borrowers found it difficult to pay their mortgages.
Today, credit standards are much stricter. The Investopedia explainsThe risky loans made back then are extremely rare today, mainly because credit standards have improved dramatically:
"In the aftermath of the crisis, the U.S. government issued new regulations to improve standard lending practices across the credit market, which included tightening lending requirements."
One example of the relaxed credit standards that led to the housing crisis is the FICO® credit score associated with a loan. What is a FICO® score? The website myFICO explains:
"A credit score tells lenders about your creditworthiness (how likely you are to repay a loan based on your credit history). It is calculated based on information from your credit reports. FICO® scores are the standard for credit scores - used by 90% of major lenders."
During the housing boom, many mortgages were issued to borrowers with a FICO score below 620. Experian reveals that, in today's market, lenders are more cautious about lower credit scores:
"Statistically speaking, 28% of consumers with credit scores in the reasonable range are likely to become seriously delinquent in the future ... Some lenders don't like these odds and choose not to make you work with people whose FICO® scores fall into this range. "
Definitely, there are still loan programs that allow a score of 620. However, lending institutions in general are much more attentive to risk measurement when approving loans. According to o Ellie Mae newest Origination Insight Reportthe average FICO® score on all loans originated in February was 753.
The chart below shows the billions of dollars in mortgage money given annually to borrowers with a credit score below 620.
In 2006, mortgage lenders granted US 1TP2Q 376 billion in loans for buyers with scores below 620. Last year, this number was only US $ 74 billion.
Summary
In 2006, lending standards were much more relaxed, with little evaluation done to measure the borrower's potential to repay the loan. Today, standards are tighter and risk is reduced for lenders and borrowers. These are two very different real estate markets, so there is no need to panic about today's lending standards.
Are you in doubt?
Now that you understand how the real estate finance market has matured after the bubble of 2008 and 2009. We can help you understand the behavior of the real estate market so you can consider investing in vacation homes in orlando. To take advantage of all the tips we have brought to you and to go even deeper, you can talk directly to our relationship agents. They are always happy to talk to you with any questions you may have about investing in Florida.
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