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Lending Standards Are Not Like They Were Leading Up to the Crash


Concerns about a housing market crash may be looming in your mind, but fear not! The current housing market is vastly different from the one that experienced turmoil in 2008. While there are many reasons that the market is different, one significant factor contributing to this distinction is the transformation of lending standards. Let's examine the data to help prove it.

Every month, the Mortgage Bankers Association (MBA) releases the Mortgage Credit Availability Index (MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

This index serves as a gauge of mortgage accessibility, offering insights into the ease of obtaining a mortgage. Take a look at the graph below, which charts the MCAI since its inception in 2004, revealing the evolution of lending standards over time. Here's how it works:

  • When lending standards are less strict, it’s easier to get a mortgage, and the index (the green line in the graph) is higher.

  • When lending standards are stricter, it’s harder to get a mortgage, and the line representing the index is lower.


In 2004, the index stood at approximately 400. However, by 2006, it skyrocketed to over 850. Fast forward to today, and the story takes a different turn. Following the housing crisis, the index plummeted as lending standards tightened, making it harder to secure a mortgage.


Loose Lending Standards Contributed to the Housing Bubble

Lending standards were a lot less strict back in 2008, which is one of the main factors that contributed to the housing bubble Realtor.com explains it like this:

“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.”

The tall peak in the graph above indicates that leading up to the housing crisis, it was much easier to get credit, and the requirements for getting a loan were far from strict. Back then, credit was widely available, and the threshold for qualifying for a loan was low.

Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan. That means creditors were lending to more borrowers who had a higher risk of defaulting on their loans.


Today’s Loans Are Much Tougher To Get than Before

As mentioned, lending standards have changed a lot since then. Bankrate describes the difference:

“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”

If you look back at the graph, you’ll notice after the peak around the time of the housing crash, the line representing the index went down dramatically and has stayed low since. In fact, the line is far below where standards were even in 2004 – and it’s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:

“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”

What this decreasing index suggests is that standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.


The Mullin Message


Leading up to the housing crash, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. This created a lot of risk in the market. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. This highlights that these are two very different housing markets, and this market isn’t like the last time. If you've been thinking about making a change and just aren't sure if it's the right time, connect with us today and we're happy to help you think through what's right for you whether it's 1 month or several years away.

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