The Urban Institute’s (UI’s) Housing
Finance Policy Center has updated its credit availability index (HCAI) to
reflect data for the second quarter of 2020. The Index shows a slight dip from
an adjusted 5.3 percent in the first quarter to 5.2 percent in the second
quarter. Tightening in the GSE and government channels has driven a retraction
of credit availability through the first half of 2020, as the risk in the
portfolio and private-label securitization market remains a shadow of what it
once was.

The HCAI measures the percentage of
owner-occupied home purchase loans that are likely to default-that is, go
unpaid for more than 90 days past their due date. When the HCAI declines it
indicates the lenders have a greater unwillingness to tolerate defaults and they
are imposing tighter lending standards, making it harder to get a loan. A
higher HCAI indicates a higher tolerance for defaults and that lenders are
taking more risks, making it easier to get a loan.

The agency market began to tighten at
the end of Q1 2020 due to the COVID-19 crisis.
This continued into Q2. Credit
overlays have cut mortgage availability for borrowers with less than perfect
credit while portfolio and private label lending have backed away from purchase
originations and their market share has contracted significantly.

Access to GSE loans, those guaranteed
by Fannie Mae and Freddie Mac, began to grow in the third quarter of 2011 as the
financial crisis ebbed. From there, the total risk taken by that channel more
than doubled, from 1.4 to 3.1 percent by the first quarter of 2019. This was
still modest by pre-crisis standards. It then slipped back for over a year,
falling to 2.7 percent in the first quarter of this year and remaining there in
Q2.

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The total default risk the
government loan (FVR) channel is willing to take bottomed out at
9.6 percent in Q3 2013 and fluctuated in a narrow range above that number
for three years. The channel, which includes loans from FHA, VA, and the USDA,
also peaked in Q1 2019, reaching 12.2 percent for the first time since 2009. In
Q2 2020, the risk receded to 10.8 percent, moving closer to 2016 levels
but  still far below the pre-bubble level of 19 Р22.8 percent.

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The portfolio and private-label
securities (PP) channel took on more product risk than the FVR and GSE channels
during the bubble but then both product and borrower risks dropped sharply. The
numbers have stabilized since 2013, with product risk well below 0.5 percent
and total risk largely in the range of 2.3-3.0 percent; it was 3.0 percent in
Q2 2020. However, the PP market share plummeted during the COVID-19 crisis, as
borrowers increasingly used government or GSE channels or could not obtain a
mortgage at all.

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UI says there is significant remaining
space to safely expand the credit box. Even if the current default risk were
doubled across all channels, it would still be well within the pre-crisis
standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.

By Jann Swanson , dated 2020-11-03 10:49:16

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Courtesy of Mortgage News Daily

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