Surprise! Mortgage Standards Being Lowered


As you no doubt know, various government agencies have moved the ball pretty far down the field with respect to loosening down-payment requirements for loans from Fannie and Freddie. The return of the 3% down mortgage seems to be pretty much assured. Arnold Kling offered this with respect to a Calculated Risk post on the availability of mortgage credit.

Is mortgage credit too tight?–Calculated Risk.

Not by the standards currently set by politicians. If you tell banks you have zero tolerance policy for making type I errors (making loans that eventually default), you have to expect many type II errors (passing up good loans). Of course, 10 years ago, the political pressure was the opposite.

The standards to which he refers are the multibillion dollar fines levied for past mortgage origination sins. Banks naturally took these actions as a not so subtle clue to tighten loan standards. We could differ on the reasons the fines were imposed but the political class has at least given lip service to the idea that a return to the old regime was unacceptable. In essence they profess to have learned their lesson well – until now.

Consider these two graphs. The first one shows the relationship between credit availability, or perhaps more appropriately relative looseness of standards, to mortgage delinquencies. You can overstate the correlation in this data, demographics, interest rates and consumer psychology likely played a big part in this disaster, but the easy availability of credit was certainly a contributing factor. . I do wish I could find an HCI which went back further as a comparison to today’s lending standards, but this is all I have or could find.

The second graph traces the performance of median home prices since 1970. Notethat the dips have been just that, blips, not catastrophic crashes save for what began to transpire in 2006. The point being that real estate cycles, particularly as they relate to single family homes are typically very long.

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