The continued sluggishness of the residential real estate market is maddening and, very likely, holding back other sectors of the economy. We’d all like to find a solution, of course. But in our frustration, it seems, we have a tendency to reach for overly simplistic solutions that don’t get us any closer to the real thing and may even be holding us back.
I’m talking about the drumbeat of arguments suggesting that bank lending standards have gotten excessively restrictive – that, in short, tightfisted banks are rejecting mortgage applicants at an never-seen-before pace. “Home buyers face unprecedented hurdles in qualifying for a mortgage in today’s market,” stated a recent presentation by the National Association of Realtors. The solution proposed by NAR president Ron Phipps is to “get back to reasonable lending standards.” And a recent report from the American Institute of Architects, meanwhile, noted that lending standards “remain very tight by historical standards.”
The fact is, this simply isn’t true.
Yes, today’s homebuyers encounter more onerous paperwork requirements and shrewder due diligence from lenders than they did a few years ago. And yes, the baseline requirements for getting a mortgage have gone up. But a slightly longer historical perspective shows that current standards are hardly an historical anomaly.
For example, loan data collected under the Home Mortgage Disclosure Act (HMDA), which covers more than 80% of all home lending in the United States, reveals that, in 2000, 54% of applications for conventional home mortgages resulted in mortgage originations. (The rest, 46%, were denied, withdrawn, or approved but not accepted by the borrower.) By 2006, standards were indeed looser, and 61% of applications resulted in originations.
So what happened after the bust? Would it surprise you to learn that 63% of conventional mortgage applications resulted in originations in 2010? That’s right, for conventional mortgages, the conversion rate between applications and originations was actually higher last year than in either 2000 or 2006.
How about the terms on which credit is being offered, specifically the amount of down payment being paid by current borrowers? A good measure here is the loan-to-value ratio tracked by the Federal Housing Finance Agency (FHFA). Down payments reached a low of 19% in May 2007. And what are they now? 21.7% Higher, yes, but still well below the historical average since 1973 of 24.3%.
The FHFA loan-to-value data cover only first lien mortgages, not so-called “piggyback loans,” which include a second mortgage or home equity loan. So here at Zillow, we ran the numbers on the combined loan-to-value (CLTV) ratio, which captures the total across all loans. The result? For the period 1997 to 2010 the median CLTV ratio across markets went from 80% in 2000, to 96% in late 2006, to 78% in late end of 2010. Again, only the credit standards of the boom period look unusual in the larger historical context.
Even among subprime borrowers – the third of the population with credit scores below about 620 or who can’t make a 20% down payment – mortgage credit isn’t as tight as some would have us believe. It’s true that subprime loans as a percentage of total loans has fallen from 28% in 2006 to close to zero now, according to the Center for Responsible Lending. But the Federal Housing Administration, whose minimum down payment requirement is just 3.5 percent, has dramatically ramped up its participation in the mortgage market, providing substantial support for borrowers with lower credit scores or lower down payments. Since 2005, the share of FHA-backed, single-family, purchase mortgages has more than quadrupled – from 4.5% to almost 20% in 2009.
Look, it’s clear to all that the housing market is severely challenged. But that’s not because mortgage standards aren’t as loose as in 2006. It’s because we’ve got 28.6% of single-family mortgages in negative equity, 9% unemployment, home values that are still falling 4.4% a year, and 22 million households where adult children have moved in with parents or where multiple families live together instead of on their own.
In other words, this is a confidence crisis, not a credit crisis. And let’s not chase fool’s gold again by artificially pumping up housing demand through looser mortgage standards only to achieve an outcome that is not sustainable in the long term.
Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. He heads the company’s data and analytics team, which develops housing market data and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).