Are post-crisis credit requirements holding back 1.2M mortgages?

The number of mortgages that could be made if credit conditions and requirements were at traditional, pre-crisis levels could top 1.2 million.
That’s the finding of Laurie Goodman, center director for the Housing Finance Policy Center at the Urban Institute, in a paper the Institute put out on the challenges minority households face in the new credit environment.
“Compared to 2001 lending standards, as many as 1.2 million loans were “missing” in 2012 alone due to lower credit availability—disproportionately impacting African American and Hispanic households,” Goodman writes. “The number of new mortgage loans is at its lowest in more than a decade and borrowers with low FICO scores are shut out. But changes in home purchase loan volume during the boom, bust, and recovery reveal just how much harder minorities are getting hit.”
That finding echoes the sentiment of Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, speaking at the National Community Reinvestment Coalition’s annual conference in Washington, D.C., on Friday.
Gruenberg noted that in the United States, half of all Hispanics and 55% of blacks are “unbanked” or “underbanked.”
Goodman’s study drills deep into disparities among varying ethnic and racial groups, noting that from 2001 to 2012, the share of non-Hispanic whites increased from 68% to 71% of all borrowers and Asian borrowers grew from 4% to 6%. Blacks increased their percentage among all borrowers from 6-8% between 2001 and 2005, but that dropped to 5% by 2012. Hispanic borrowers increased from 9% in 2001 to 13% in 2005, before dropping back below 9% by 2012.
“While all borrowers lost household equity in the Great Recession and are now feeling the crunch of tightening credit, minority borrowers may feel it most. Many of these minority borrowers received the kind of predatory mortgages now forbidden under the Dodd-Frank Act,” Goodman writes. “With the subsequent downturn in prices, particularly in minority neighborhoods, higher minority default rates are not surprising. Now, strict credit standards and lowered FICO scores due to missed payments or foreclosure prevent many of these same borrowers from entering the housing market despite lower prices.”
If 2001 credit availability standards were applied in 2012, more households would be receiving mortgages.
“Today’s credit inaccessibility is locking out African American and Hispanic borrowers disproportionately—at exactly the point in the economic cycle that favors new homeownership,” Goodman says.
In explaining how she and her co-authors of the study concluded that as many as 1.2 million mortgages were not done in 2012 that could have been, Goodman explains that they measured this based on 2001 credit availability levels.
“Based on the upper bound calculation, 1.22 million fewer purchase mortgages were made in 2012 than would have been the case had credit availability remained at 2001 levels,” she writes.
The researchers reached their conclusion as follows: The volume of > 750 FICO loans was down by 18% in 2012 compared with 2001. Assuming that each of the lower FICO buckets would have declined by 18% — rather than declines of 70 and 46% for the < 660 and 660–750 buckets, respectively – if there were no change in credit availability, the total number of loans made to borrowers with FICO scores in the < 660 and 660–750 buckets would have been 1.77 million. The actual number of loans for these groups was1.23 million, a difference of 540,000.
Then they multiplied this difference by 2.23 to match their loan count to HMDA data, allowing them to conclude there are 1.22 million (540,000 × 2.23) missing first lien loans.
“These results illustrate that constrained credit availability has decreased the number of purchase mortgages being made in the current environment, especially for prospective owner-occupants,” Goodman and her co-authors wrote.