The impact of the financial crisis on current borrower access to mortgage credit is evident. (KE: The impact of borrower access to mortgage credit on the financial crisis is evident. - FIFY) Today, the credit score of the typical new mortgage borrower is nearly 40 points higher than the typical borrower in the early 2000s. The average credit score for those obtaining a loan backed by Fannie Mae and Freddie Mac (collectively, the government sponsored enterprises, or GSEs) in conservatorship is nearly 750. The minimum credit score to qualify for a mortgage at the GSEs is 620, yet only 1 percent of all new mortgages originated across the industry are to borrowers with FICO scores below 665. While creditworthiness is certainly a critically important factor, this credit selectivity is especially sobering given the fact that more than 40 percent of all FICO scores nationally fall below 700. While a variety of factors contribute to these outcomes, it is clear that the GSEs and the secondary market can do more to reach a broader swathe of creditworthy households. Constraints on access to affordable credit have ripple effects across the owner-occupied housing market. When a large number of first time homeowners cannot buy a home, established homeowners may face a harder time relocating or moving up in the market.
If only the Bush administration had figured that out in the last year of their term, or if Obama had noticed in the first year of his. The GSEs were taken over in 2008.
The curious thing about my project is many facts are slowly being accepted across the spectrum of observers. But, will readers be willing to accept the conclusions that those facts point to when they populate a coherent narrative? Will we admit that we fought an unnecessary war? And, in the end, is that what the delay is about, even if that isn't a conscious choice?
It is the lack of credit what done us in, not an excess of it. As this graph points out, and the White House memo seems to acknowledge, there was no excess to begin with. Some try to concoct a story that FICO scores were somehow inflated by the housing boom. But, an expansion of credit or real housing expenditures doesn't show up if we look at incomes or spending, either. And, in any case, if the expansion of credit can happen with little discernible movement in FICO scores for nearly a decade, what does that say about the scale of a 50 point increase that happened during the bust.
The government took over most of the mortgage market, and supported the top half of it. For the bottom half, the worst of the bust came after that - both in terms of defaults and in terms of lost equity.
If they actually follow through on this, prices at the low end of the housing market will rise significantly, which would be great. Not because it matters whether prices are high or low, but because it matters that prices are free to reflect accessible markets. The only reason those prices are low now is because we are killing the mortgage market, and locking middle income households out of the market, to keep them that way. That's the rigged system.
Success might push us even more quickly into a recession, because there seems to be a consensus that we have to prevent markets from clearing. But, at least there is are green shoots of statements of the obvious here. Baby steps.