Tightening Lending Standards Point to a Cooling Housing Market

Residential mortgage lending standards are tightening, reports the Mortgage Bankers Association as housing prices reach all-time highs.

“Mortgage credit availability in June fell to its lowest level since September 2020, ending more than half a year of increasing credit supply. The overall credit availability index remains close to 2014 lows, as mortgage credit has not recovered since the sharp downturn in the first half of 2020,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

He pointed out the tightening of mortgage credit availability was happening as a result of GSE policy changes which reduced the availability of high LTV refinance loans, impacting both conforming loans and GSE-eligible high balance loans.

The MBA expert added there was the addition of refinance programs designed to reduce costs for lower income borrowers, but the full impact of those new loan programs remains to be seen. In addition to the tightening in supply from the policy change, there was also a pullback in jumbo ARM offerings, which contributed to the lowest supply of jumbo credit since February 2021.

The report is another indication the housing market is cooling.

For instance, mortgage applications for new home purchases decreased 5.9% compared to a year ago, according to the Mortgage Bankers Association Builder Application Survey data for May 2021. The BAS tracks application volume from mortgage subsidiaries of home builders across the country. Applications decreased by 9% compared to April.

“Mortgage applications to purchase a new home decreased in May for the second straight month, while the average loan size, at $384,000, increased for the fourth consecutive month and reached a new survey high,” Kan said in June.

MBA estimates new single-family home sales were running at a seasonally adjusted annual rate of 741,000 units in May 2021. It derives mortgage application information from the BAS, as well as assumptions regarding market coverage and other factors. May’s seasonally adjusted estimate is a decrease of 3.8% from the April pace of 770,000 units. Kan says the rate of new home sales has fallen around 20% since reaching a survey-high 927,000 units in October 2020. He attributed this to low housing inventory and rising prices.

MBA estimated that there were 68,000 new home sales on unadjusted data in May 2021. That is a decrease of 5.6% from 72,000 recent home sales in April.

Another indicator comes from Redfin, which recently noted that mortgage purchase applications have been falling since late March. They increased 0.3% week over week (seasonally adjusted) during the week ending June 4. Despite low mortgage rates and easing access to credit, they are now 7% below their average levels in January and February 2020.

Meanwhile, housing prices continue to increase. Last month, the S&P CoreLogic Case-Shiller US National Home Price NSA Index reported its tenth consecutive month of accelerating prices with a 13.2% gain from year-ago levels, up from 12.0% in February.

This increase was last exceeded 15 years ago in December 2005, “and lies very comfortably in the top decile of historical performance,” Craig J. Lazzara, managing director and global head of Index Investment Strategy at S&P DJI, noted.