Are we over-correcting from the mortgage crisis? More Americans now think lending is too strict than too loose

Is mortgage lending too tight, or too loose? That seems to be a question the FHFA has been trying to answer since the housing crisis in 2008. Many factors led to the housing collapse, but no doubt the overly lenient mortgage lending practices were the biggest culprits. To make sure history does not repeat itself, mortgage-lending rules are now noticeably more restrictive compared to those in 2006, at the height of the housing bubble. On the other hand, there are indications lending standards might now be too strict, preventing further recovery of the housing market.

In early February, the Urban Institute Housing Finance Policy Center published a research that found low-credit applicants accounted for only 33% of all mortgage applications in 2015 – that compares to 62% in 2006, and 50% in 2000, when market conditions were generally considered balanced. After release of the report, co-director of the Housing Finance Policy Center told MarketWatch in an interview “the credit box is too tight”, and may even cause some would-be mortgage applicants to lose interest in homeownership. The Center’s analysis suggested 1.1 million mortgages that would have been made in 2001 were “killed” or not written in 2015.

In January 2017, ValueInsured asked American homebuyers in its quarterly Modern Homebuyer Survey what if they believe current mortgage lending practices are too strict, too loose, or fair. Based on the results, lending rules are certainly perceived to be tighter than 2006 levels. The results are consistent with findings from the Housing Finance Policy Center:

  • 78% of all Americans believe the current mortgage lending practices are fair, or too strict. 83% of Millennials believe the same.
  • Specifically, more Americans believe lending rules are too strict (42%), than they are fair, “not too strict and not too loose” (36%).
  • Almost twice as many Americans believe current lending is too strict, “it’s hard to qualify for a home loan” (42%) than those who believe lending rules are too loose, “it’s too easy for people who shouldn’t qualify to get a home loan” (22%).
  • Over 1 in 2 Millennials (52%) – traditionally the largest demographic supply stream of first-time homebuyers – believe mortgage lending practices are now too strict. Only 17% (less than 1/3 compared to the former group) believe lending is now too loose.
  • Echoing data from the Housing Finance Policy Center, ValueInsured’s consumer attitudinal findings are note-worthy as they point to a potential barrier that keeps would-be homebuyers, especially Millennials, from entering homeownership.

In Q2 2016, Millennial homeownership rate dropped to the lowest in recorded history, at 34.1%. Both Zillow and forecasted low Millennial homeownership rate will turnaround in 2017. Without returning to the days of overly permissive lending of 2006-08, it is important that the next-generation of homebuyers – the largest American population segment in history – feel welcomed and empowered by the lending industry to participate in the American Dream.