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A great deal of the current discussion in the press and financial circles revolves around the level of mortgage rates. This is particularly true after the latest Federal Open Market Committee (FOMC) meeting, the arm of the Federal Reserve that decides monetary policy and what to do regarding short-term interest rates. We have discussed our thoughts on mortgage rates several times in the past.
However, we would like to turn to the availability of mortgage credit. After all, a few years ago, mortgage rates fell precipitously, but banks were unwilling to lend as financial institutions were dealing with large credit losses and a weak economy.
We examine the data to determine the trend for how easy it is to obtain a mortgage.
Trend is encouraging
There is good news for potential borrowers. Mortgage availability increased in August, according to the Mortgage Bankers Association (MBA). This was based on the Mortgage Credit Availability Index, which was 126.1 compared to 125.6 the prior month. An increase in the index indicates lending standards are easing.
Mortgage credit has expanded in eight of the last nine months. This is certainly good news for borrowers.
In order to put this figure in historical context, back in 2011, availability fell from 110 to below 100 from July 2011 to December 2011. It hovered at low levels for months thereafter.
Breaking down loans
There are different types of mortgage loans. In New York City, it is also appropriate to examine the jumbo loan market. In higher price markets, such as NYC, the threshold is $625,500 for such loans. Anyone that has been shopping for a home in Manhattan, or even Brooklyn these days, knows prices often require borrowing at these levels.
There is good news on this front, as well. Last year, there were reports that banks were easing requirements for jumbo mortgages. This includes compensating in other ways for items that might have blocked the loan in the past, such as a shortfall in income documentation.
The Jumbo Credit Availability Index showed the greatest loosening. It was up 0.7% from the prior month.
Where do we go from here?
It appears borrowers have continued to repair their finances. This bodes well, since banks are more apt to lend to financially healthier borrowers. Overall, household debt was 6.5% below the peak in 2008, according to the Federal Reserve Bank of New York. Mortgage debt, the largest component, was down from the first quarter.
There are those that are fretting an interest rate hike from the Federal Reserve. However, the central bank’s unprecedented moves to appear to have worked. Quantitative Easing (QE) lowered long-term interest rates. Ultimately, lending picked up when banks’ balance sheets were cleaned up after the bad loans and foreclosed properties were cleared.
Despite worries about China, the U.S. economy remains healthy. The job market has continued to improve. In August, 173,000 jobs were created and the unemployment rate dipped to 5.1%, based on data release by the Department of Labor.
Clearly, the days of ultra-easy borrowing are behind us. It is hard to believe, but people were getting loans with little or no documentation. Banks did not ask enough questions and borrowers were hoodwinked into believing real estate prices rise in perpetuity, enabling a refinancing or selling the home in short order.
However, borrowers need not long for those days. We have reached a healthy state. Mortgages are available those that are creditworthy. Unlike a few years ago, you will have to have your finances lined up, demonstrating items such as proof of income, assets, and a strong credit score.
It is also prudent to remember all mortgages are not created equally. One needs to look beyond the rate, and factor in fees. Doing your homework and being informed can save you a lot of money over the long-run.