Credit standards for loans have tightened, but at the same time, oddly enough, there has been a drop in loan denial rates.
CoreLogic economist Archana Pradhan believes some would-be borrowers–who may fear tighter qualification standards–are self-sidelining from applying for a loan.
In 2014, single-family purchase loan applications totaled 4.6 million. That is down 60 percent from 11.7 million applications in 2005. In 2005, 7.4 million single-family purchase loans originated but that dropped to 3.2 million by 2014. The denial rate for purchase applications peaked in 2007 at 18.7 percent. In 2014, it dropped to 13.2 percent.
Pradham says that if credit standards are so much tighter today, why aren’t denial rates higher than 2005 and 2006? Certainly, Pradham notes that there may be fewer applications from riskier borrowers today.
And credit, indeed, has tightened. The credit score for home purchase originations rose from about 700 in 2005 to nearly 750 in 2015.
Pradham says that the higher credit scores may be eliminating borrowers at the low-end of the range. But the answer also might be more complex, Pradham notes.
“The observed decline in originations could be a result of potential applicants being either too cautious or discouraged from applying, more so than tight underwriting as the culprit in lower mortgage activity,” Pradham suggests. She believes the caution is from a “self-sidelining” that has made it appear that credit is tightening more than it has.
Pradham says more consumer education is needed to help raise origination levels and that may have a bigger impact than introducing new lending products with lower credit standards.
Source: “Are Some Borrowers ‘Self-Sidelining?” Mortgage News Daily (May 23, 2016)