The U.S. mortgage finance market today is all about credit for the best, with little left over for the rest.
Take a look at first-quarter numbers from the Federal Reserve Bank of New York's consumer credit panel: Some 58 percent of the $389 billion in mortgages originated went to people with an Equifax Risk Score of 760 or higher (scores range from 280 to 850). Counting by the number of loans, instead of dollars, the share was 51 percent, the New York Fed said.
Borrowers with a score in the range of 620 to 659, which many lenders view as below-prime credit, received just 4.6 percent of the dollar volume of mortgages in the quarter. Compare that with the same quarter of 2004: The 760-or-higher group received 23 percent of the mortgages as the 620-to-659 borrowers received 9.7 percent. While surveys say credit is loosening for some types of loans, standards are still far tighter than they were pre-crisis.
"Blue-collar people need not apply," said John Taylor, president of the National Community Reinvestment Coalition in Washington, adding that the mortgage market is more restrictive than any time during his four decades as a housing advocate. That's surprising, he said, because the financial crisis and subsequent regulatory changes weeded out many bad practices and put new safeguards in place.
Nobody wants a return to the no-standards lending of the mid-2000s. At the same time, concentrating mortgage credit around the best borrowers is unhealthy from the standpoint of the widening wealth disparity in the U.S. Homeownership is the way many middle-income families build equity. Black home ownership rates fell to 41.5 percent in the first quarter, the lowest since 1995, and rates for Americans overall have been below 64 percent for the past five quarters, levels not seen since 1994.
The data raise questions about whether regulators and banks have become too risk-averse. It's also possible that borrowers without prime credit have just given up owning a home for now.
Figures from property-data provider CoreLogic show that home-purchase mortgage applications from borrowers with credit scores below 640 fell to 6 percent in 2015, from 29 percent in 2005. In other words, lower-rated borrowers aren't even applying. The reasons for that are puzzling, said Frank Nothaft, CoreLogic's chief economist.
"Are they being discouraged by agents, by lenders, or by the media that credit is tight? It isn't clear,'' Nothaft said.
Here are two possible answers.
Rising home values may simply be putting property out of reach for a lot of lower-income people. Prices in Miami are up 53 percent from a 2011 post-crisis low, according to an S&P/Case-Shiller index. Nationally, prices are up 32 percent from their 2012 low. Higher prices require larger down payments and bigger mortgage payments, especially for borrowers with lower credit scores.
"Prices have recovered dramatically, and options to buy for people with lower credit are limited," said Aaron Terrazas, a senior economist at real-estate website Zillow.
An additional hint comes from foreclosure data analysis by the Urban Institute. Of the 7 million Americans who experienced foreclosure from 2004 to 2015, only 7.3 percent obtained a mortgage again.
Less than half of those people had repaired their Vantage credit scores by August 2015 to bring them above 620, the baseline for mortgage qualification today, the Urban Institute said. (Vantage scores range from 300 to 850.)
If there is a smoking gun in the institute's analysis, it's probably this: Sixty-nine percent of the 7 million still had foreclosure on their credit reports as of last month, which precludes them from getting back into the traditional mortgage market.
The housing credit debacle and the recession had a long-lasting impact on people's credit histories, and that may be affecting their ability to get a mortgage again.
"Under today's standards, those with damaged credit history are far, far away from getting back into the housing market," said Wei Li, a senior research associate at the Urban Institute.