Lending Practices Are Not Like 2006

You might be worried we’re heading for a housing crash, but there are many reasons why this housing market isn’t like the one we saw in 2008. Lending standards are different today. Here’s a look at the data to help prove it. 

Every month, the Mortgage Bankers Association (MBA) releases the Mortgage Credit Availability Index (MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”

In 2004, the index was around 400. But, by 2006, it had gone up to over 850. Today, the story is quite different. Since the crash, the index went down because lending standards got tighter, so today it’s harder to get a mortgage.

Loose Lending Standards Contributed to the Housing Bubble

One of the main factors that contributed to the housing bubble was that lending standards were a lot less strict back then. Realtor.com explains it like this: 

“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.” 

Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan. That means creditors were lending to more borrowers who had a higher risk of defaulting on their loans.

Today’s Loans Are Much Tougher To Get than Before

As mentioned, lending standards have changed a lot since then. Bankrate describes the difference: 

“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”

The decreasing index suggests standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.