Mortgage credit availability dipped slightly at the end of last year and has been further restricted by current economic pressures, according to the latest Housing Credit Affordability Index [1] from the Housing Finance Policy Center at the Urban Institute [2].
Mortgage credit availability among all three main channels—the GSEs, the government, and the private label market—remains far more restricted than the days leading up to the Great Recession. In fact, if current risk levels were doubled, risk would still be lower than safe pre-crisis levels, according to the Urban Institute. “Significant space remains to safely expand the credit box,” the Institute states.
Credit risk stood at 5.3% as of the fourth quarter, far lower than what the Urban Institute considers the “pre-crisis standard,” 12.5%. This percentage represents the share of home purchase loans that are likely to default.
While all three channels restricted slightly, the government loan channel expanded its market share in Q4. Government loans, including loans backed by the Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture’s Rural Development program, is more accepting of risk than the other loan channels because of their position in the market.
Government loans carried a risk index level of 11.46% in Q4 2019. While higher than its low of 9.6% in Q3 2013, the latest rate is far below its pre-crisis norm, which ranged between 19% and 23%. The index level for government loans has ranged between 9.9% and 12.1% for the past 11 quarters.
Risk at Fannie Mae and Freddie Mac was on a downward trend for much of 2019, lowering to 2.70% in Q4. This is down from 3.07% in Q1 2019. In fact, Q1 2019 was the third quarter in a row in which risk levels at the GSEs were at or above 3.0%. This is particularly significant because the start of this trend in Q3 2018 was the first time GSE risk levels reached 3% since 2008. However, credit risk declined for the following quarters.
While today’s risk level remains far below pre-crisis norms, risk at the GSEs almost doubled between Q2 2011 and Q4 2019.
The portfolio and private-label securities loan market continued to hold its position as the most risk-averse of the loan channels. Overall risk for this loan sector was at 2.60% in Q4 2019 with borrowers accounting for almost all the risk at 2.59%.
Risk plummeted in the private market following the financial crisis in 2008 and has regained little ground since. However, risk has “stabilized” in the private sector since 2013, according to the Urban Institute. Borrower risk has ranged between 2.0% and 3.0%, while product risk has wallowed below 0.6%.
The Urban Institute pointed out that its latest index does not reveal any of the impact of the current economic pressures but alluded to “significant credit tightening” as a result of the COVID-19 pandemic.