For borrowers with less-than-pristine credit, obtaining a mortgage remained difficult in 2014. We estimated last spring that 4 million more loans would have been made between 2009 and 2013 if credit standards had been similar to 2001’s reasonable levels. Using new 2014 data, we have now determined that an additional 1.2 million loans were missing in 2014, bringing the total to 5.2 million missing loans between 2009 and 2014.

Why is credit so tight?

Mortgage credit today is much tighter than it was at the peak of the housing bubble in 2005 and 2006, which is expected and appropriate. But it is also significantly tighter than it was in 2001, prior to the housing crisis. Our Housing Credit Availability Index (HCAI) continues to show the market is taking less than half the credit risk it was taking in the pre-crisis period.

The factors contributing to the tight credit box are complex, ranging from the issue of lender overlays due to repurchase risk, to the high costs of servicing delinquent loans, to fears of litigation by the Department of Justice, the HUD Inspector General, or State Attorneys General.

A tight credit box means that fewer families will become homeowners at an opportune point in the housing market cycle, depriving them of a critical wealth-building opportunity. It slows the housing market recovery by limiting the pool of potential borrowers. Ultimately, excessively tight credit hinders the economy, as it slows all the associated economic activity that comes with home buying, such as furniture purchases, landscaping, and renovations.

How did we calculate the 1.2 million?

Our methodology is laid out in detail in our original 2014 brief, but we offer a shorter explanation here.

To develop a specific estimate of the number of missing loans, we combined Home Mortgage Disclosure Act (HMDA) data and CoreLogic servicing data, allowing us to identify the FICO scores on all loan files. We then calculated what mortgage originations would have been if borrowers of all credit levels had the same access to the mortgage market in 2014 as they did in 2001. 

Drop in first-lien purchase mortgages

Purchase mortgages dropped from 4.65 million in 2001 to 3.1 million in 2014, a 33 percent decline. This reflects an absolute drop in new and existing home sales, as well as, beginning in 2007, a significant influx of investors making cash purchases . Both the drop in sales activity and the increase in cash sales can be traced to limited credit availability, making it more and more difficult for both first-time buyers to purchase homes and for current owners to trade up. Accordingly, many of the homes foreclosed upon during the crisis have ended up in the hands of investors paying cash. In other words, if credit were more available, more investor-owned homes would be owner-occupied instead.

Increase in the share of high FICO score borrowers

The significant increase in the percent of borrowers with high FICO scores since 2007 indicates that access to credit has tightened dramatically. To determine how this tightening has impacted mortgage originations, we compared the change in mortgage originations across three groups of borrowers. We found that the number of borrowers with FICO scores above 700 shrank by 7.5 percent from 2001 to 2014; Borrowers with FICOs between 660 and 700 shrank 30 percent; and those with FICOs below 660 shrank 77 percent. We assumed that if 2014 credit availability were the same as that in 2001, the lower–credit score borrowers would have experienced the same percent decline in loan volume as higher-credit score borrowers. The gap between the hypothetical estimate and the actual volume is the number of missing loans.

The 1.2 million missing loans in 2014 match our estimate for 2013, reflecting little improvement in credit availability. One can argue this analysis represents an upper bound, as lower FICO borrowers may also have less demand for home ownership, but it is an important first step to quantify to impact of limited credit availability.

While some progress has been made, the new missing loans estimate makes it clear that we need to increase efforts to expand the credit box. Policymakers should resolve the uncertainly surrounding agency repurchases, evaluate why the costs of servicing delinquent loans are so high and reassure lenders that costly litigation does not lie behind every default. Broadening lending standards is critical for cultivating and sustaining a more robust recovery in the housing and mortgage markets and, ultimately, the entire economy.