Were Mortgages Lost from Tight Credit Restrictions?

A new study by the Urban Institute calls for "expanding the credit box" in order to promote not only a housing recovery, but an overall economic recovery. The report estimated, "1.22 million fewer purchase mortgages were made in 2012 than would have been the case had credit availability remained at 2001 levels."

The report, “Where Have All the Loans Gone? The Impact of Credit Availability on Mortgage Volume,” reported that in 2001, 4.93 million first lien mortgages originated for home purchases.

"The number of originations rose to 6.03 million in 2005 and dropped to 2.74 million in 2012. This represents a 44.4 percent decline since 2001 and a 54.5 percent drop from the peak volume of 2005," the report said.

The loss of mortgages not only affects the housing recovery, but supplemental businesses like landscaping, furnishings, renovations, and other consumer spending related to owning a home are slowed, affecting overall economic recovery.

The report argues that lower sales activity is only partially responsible for the drop in mortgage volume.

Sales volume was 6.25 million units in 2001. In 2005, sales volume was 8.36 million units, dropping to 5.01 million units in 2012, a 20 percent decrease from 2001.

Another factor leading to a decrease of new home purchases was an increase of investor activity in the housing market, rising from 17.8 percent in 2001 to 39.5 percent in 2012. "[W]e can largely explain the drop in originations by the concurrent decline in home sales and the increase in the all-cash share," the report said.

An increase in foreclosures, nearly 7 million, creates a situation where foreclosed-upon borrowers must wait at least three to five years to qualify for a new mortgage, according to the Urban Institute report. The large volume of renters with a limited availability of credit to purchase a home only exacerbates purchases by investors paying cash.

The report found that borrowers looking to purchase a home with credit scores in the middle tier (660-750) and lower tier (sub-660) declined 46 percent and nearly 70 percent, respectively, from 2001 to 2012.

An estimated 273,000 to 1.2 million loans were not originated due to limited credit availability.

The report commented, "The truth is somewhere between these estimates, but likely closer to the upper bound because many prospective borrowers with FICO scores well above 660 are affected by the tight credit box and credit overlays."

Race also played a factor in the decline of loan originations.

"Comparing 2001 to 2012, the number of purchase loans to African American and Hispanic borrowers declined by 55 and 45 percent, respectively. In contrast, purchase loans to non-Hispanic whites and Asians dropped 41 and 15 percent, respectively," the report said.

Florida was the hardest-hit state, with a 61 percent drop in purchase loans.

The report credits the drop in purchase loans to Florida's larger overhang of foreclosed properties. "Other Sand States such as California, Arizona, and Nevada also experienced large drops in purchase activity (between 45 and 49 percent), but not nearly as large as Florida," the report said.

The Urban Institute comments that fewer individuals will be able to become homeowners at the exact moment when it is most advantageous to do so, thus losing a valuable opportunity to build wealth.

"There is an urgent need to expand the credit box to improve opportunities for households to build wealth and strengthen the economic recovery," the report said.