Home prices have fallen by a third since 2006, creating tremendous bargains for home buyers. Mortgage rates are at rock-bottom lows, making houses more affordable than they have been in decades. Yet home sales last year fell to the lowest levels since the government began keeping records in 1963.
One big reason: mortgage bankers have gotten a lot choosier about approving loans, according to a report by Goldman Sachs economists Hui Shan and Jari Stehn. By some measures, they’re pickier than they were before the housing boom took off.
With anecdotal evidence showing that home mortgages are harder to get, the economists crunched Federal Reserve data to show just how much tighter lending standards have become. Using the results of the Fed’s survey of loan officers, the report found that lending standards rose sharply after the mortgage market collapsed and the financial system imploded in 2008. Since the recession ended in 2009, lenders haven’t eased their tight grip on mortgage money.
Part of the reason is that there’s less money available to lend. During the housing boom, as brokers produced a flood of new mortgages, Wall Street bankers churned out a torrent of mortgage-backed bonds for investors waiting to snap them up. That market has all but vanished; 90 percent of new mortgages written today are backed by the government.
The new mortgage pipeline also has slowed because it is clogged with paperwork. These days, you’ll have to fill out many more forms and produce a lot more documentation, on average, just to get your loan considered.
The percent of loans that required “full documentation” declined steadily from 2000 through 2006, hitting a low of less than 60 percent. Those “no-doc” loans were a big part of the reason mortgage bankers made the bad underwriting decisions that created the mortgage mess. Today, nearly 90 percent of mortgage applications require full documentation. That’s much higher than the pre-bubble level.
You’ll also have to show a much higher credit score than you did in the go-go days of the housing boom. In a separate report, Mortgage Marvel, an online mortgage-shopping website, analyzed data from more than 700,000 mortgage applications filed last year and found that the average FICO score was 730. That’s a significant jump from the days when borrowers with scores in the high 500s were routinely steered to high-cost subprime loans.
Applications with highest credit scores concentrated in California, Oregon, Wisconsin, District of Columbia and Hawaii, the company said. The states with the lowest credit scores were Mississippi, Arkansas, West Virginia, Louisiana and Oklahoma.