What to Know About Lending Standards Today Compared to the Great Recession

Mortgage Credit Availablity Index Data

You have probably seen numerous articles lately discussing all of the different aspects of today’s housing market, including some articles that discuss the lending practices of today compared to the leadup to the Great Recession. Today’s lending practices are much more scrupulous, and protect the economy from another situation like the housing market experienced during the Great Recession.

Looking at the Mortgage Credit Availability Index

The Mortgage Credit Availability Index (MCAI) is a measure of the difficulty it takes to get a mortgage, and is researched and published by the Mortgage Bankers Association (MBA). When you look at the chart below, paying close attention to the mortgage lending standard before 2008 compared to where we were at as recently as December of 2021, it’s clear to see that there is a stark difference between the standards of today versus the lead up to the housing market crash of 2008.

Data Courtesy of the Mortgage Bankers Association

How Have Lending Standards Changed Since 2008

Today, lenders are far more cautious when handing out a home loan, and will rigorously verify employment and income to make sure that the people they are lending to can actually afford to own a home. Today’s homebuyers are held to a far higher standard when it comes to the credit necessary to qualify for a home loan as well. On the bright side, however, the average credit score in America in 2022 was 714 according to Experian, which is a substantial increase from the average credit score in 2007, which was 689.

How Lax Lending Practices Contributed to the 2008 Housing Crisis

Because lending practices were so loose in the leadup to the housing market collapse, too many potential borrowers were allowed to own a home, some with adjustable rate mortgages that at the time were considered a far safer investment than they actually were. These borrowers who really should not have been allowed to own a home were offered “subprime” loans, which is a loan with an interest rate higher than the “prime” rate offered by the bank, which is heavily influenced by the Federal Funds rate. Additionally, these subprime loans were packaged together and sold to commercial investors as mortgage-backed securities, or MBS. Because of these poor lending practices, when the economy took a downturn and adjustable rates increased and home prices dropped, borrowers went underwater on their mortgages, and the rest of the housing crisis unfolded. Huge amounts of subprime mortgages went into default, and the markets surrounding them collapsed as well.

Contact Us to Learn More About Today's Housing Market!

If you want to learn more about today’s housing market compared to the market before the housing crisis, contact one of our experienced Realtors Ⓡ today! Our team members have seen every type of market possible, and know what it takes to get you and your family across the finish line and into a home that meets all of your needs. If you want to schedule a complimentary consultation to plan your next home purchase or sale, contact us today by calling us at (816) 268-4033, or by filling out the contact form below!

Post a Comment