n December of 2018, the Mortgage Bankers Association (MBA) reported a sharp decrease in the Mortgage Credit Availability Index (MCAI), suggesting that lending standards are tightening for existing and prospective homeowners. Here’s what you need to know:
The Mortgage Credit Availability Decrease Follows Years of Steady Increase
After the 2008 housing crisis and during the recession that followed, lending standards became exceedingly strict. Over the years, in a likely effort to reach more middle market borrowers, lenders have become gradually more lenient. By March 2012, the MCAI benchmarked credit availability at a “base level” of 100. Just before the recent December decrease, the index had peaked at 182.3, its highest value since 2007. The December measure was at 175.
Some analysts have been concerned about the increased leniency of lenders. In particular, programs from the Federal Housing Administration have been under scrutiny for fears that home buyers may not have the credit scores, down payments, and manageable debt loads necessary to reliably repay their loans. While the MCAI is nowhere near the over 800 measurement where it was before the housing crisis, many see December’s decline as a move in the right direction.
Tightened measures for future home buyers. “December’s mortgage credit availability fell to its lowest level since February of 2017 due to tightened lending standards” – Mortgage Bankers Association.
The Decrease Is Related to the End of HARP
Joel Kan, MBA’s Association’s Vice President of Economic and Industry Forecasting, explained the reason for the sudden drop: “The decline was driven by a sharp decrease in the conventional credit space, as we saw the expiration of the Home Affordable Refinance Program” (HARP).
A federal program, HARP was created in 2009 to help homeowners refinance their mortgages. The program targeted underwater and near-underwater homeowners with a loan-to-value (LTV) ratio over 80% and originally up to 105%, but was quickly increased to include those with an LTV of up to 125%. By 2011, the upper limit on LTVs was removed, allowing anyone over the 80% mark to apply. After two extensions of the program in 2016 and 2017, it finally came to an end in December 2018, contributing to the overall decrease in the mortgage credit availability index.
Lower Mortgage Credit Availability and Commercial Real Estate
A decline in mortgage credit availability, in simple terms, means that less people have access to loans to purchase homes. This bodes well for commercial real estate investors and owners, specifically those invested in multifamily housing. A squeeze on financing options available to homeowners creates potential for more consumers to remain in the rental market. With the MBA also reporting an increase in mortgage applications on the rise in December and a rising demand from first-time buyers, the crunch has the potential to retain current renters longer and push would-be new homeowners into renting until lenders become more lenient.
Additionally, a 2016 report from the Federal Reserve Board cites data which suggests that “tighter credit conditions depress both house prices and residential construction.” Slowed residential construction can lead to higher demand for commercial real estate which meets consumers’ needs for residential space in the future. Add this to the expectation for the data-driven Federal Reserve System to continue gradually increasing mortgage rate hikes, and multifamily property futures appear very secure.
“With so many future home buyers falling short of new tightened lending standards, many multifamily property owners and investors can rest assured their investments will remain in high demand for years to come.” – Charles Williams, MBA, EA
What Should Investors and Owners Do?
The trends are promising for commercial real estate owners and investors, particularly in the multifamily housing industry. Borrowers have less access to loans, a program cushioning the effects of underwater homeowners has ended, and current federal conditions are pushing towards a rise in demand for rental properties and other housing options. As consumers research whether single-family homes are a good investment and find, increasingly, that renting is more affordable and predictable, commercial real estate owners and investors can remain confident in their assets.