“In Q1 2015, the market was willing to take 5.7 percent of expected default risk, up slightly from the trough level of 4.6 percent in Q3 2013,” the Urban Institute wrote in its Housing Finance Policy Center’s Credit Availability Index (HCAI), released in late July. “The credit expansion was driven by less restrictive lending in the GSE and government markets, partly as a result of recent efforts by the GSEs, FHFA, and FHA
to reduce lender uncertainty.”
According to the Urban Institute, although credit has loosened there is still room for the market to take on even more of the risk.
“Although credit was too lax during the housing bubble years, the pendulum has swung too far in the other direction … although small progress has been made, significant room remains to safely expand the credit box,” the report states. “The mortgage market could have taken twice the default risk it took in the first quarter of 2015 and still have remained well within the cautious standard of 2001–03.”
The American mortgage market is understandably cautious, following an economic recession that was due in large part to lax mortgage underwriting standards and the ease of obtaining subprime loans.
However, it seems that the market has slowly but surely increased its appetite for risk, meaning more Americans will qualify for mortgages and more originations for loan officers to tap into.
“The HCAI’s finding of a slight loosening of the credit box since 2013 is consistent with trends in borrower median credit scores at origination,” the report states. “The median credit scores for both GSE and government loans have been on a steady decline since 2013.
“As of May 2015, the median credit score for GSE loans stood at 758, down from 769 for the same month two years ago,” it continues. “The government market experienced a similar drop, from 691 to 682 in the past two years.”
The market has begun taking on more mortgage risk, but there is even more room to loosen lending parameters, says one organization.