In recent times, there has been a noticeable ease in the accessibility of mortgage credit. January in particular saw a remarkable uptick in this trend. This notable growth in the Mortgage Credit Availability Index (MCAI) was attributed to the lending community’s progressive enabling of conditions that are favorable to borrowers.
Essentially, the MCAI is a metric that quantifies the availability of mortgage credit in the market. This index initially sprang to life in 2012 thanks to a fruitful collaboration between the Mortgage Bankers Association (MBA) and Ellie Mae, an intuitive software company that assists businesses with their technological requirements. An increase in the MCAI denotes loosening credit standards, while a decrease implies tightening credit conditions.
In this context, the development in January is promising since a higher MCAI signifies that lending standards are becoming less stringent, hence offering a welcome boost to potential borrowers. The beneficial loosening in lending standards largely came from the revival of ‘jumbo’ loans as well as adjustable-rate mortgages (ARMs).
Delving into specifics, a jumbo loan refers to a home loan for an amount that surpasses federally mandated conventional conforming loan limits. Not confined by these limits, such a loan is exceedingly beneficial for prospective homebuyers looking to invest in higher-end real estate or properties in competitive markets. By virtue of sheer size, these loans represent higher risk for lenders as the larger loan amount can result in increased losses if a borrower defaults. Consequently, they are usually associated with more stringent lending conditions. However, January’s MCAI surge revealed a significant change in this trend.
Meanwhile, Adjustable-Rate Mortgages (ARMs) are loans with interest rates that fluctuate based on market conditions. Unlike fixed-rate mortgages, which maintain the same interest rate throughout the loan term, ARMs alter the interest rates periodically. Initially, ARMs may offer lower interest rates, constituting an appealing option for borrowers. Despite the risk of potentially increasing interest rates over time, which may result in higher monthly payments, the revival of ARMs in the lending landscape is a major contributing factor to the escalating MCAI.
Furthermore, the Government MCAI, which measures FHA, VA, and USDA loan programs also reported growth, albeit at a significantly slower pace. FHA Loans, administered by the Federal Housing Administration, VA Loans, guaranteed by the Veterans Affairs, and USDA Loans, managed by the United States Department of Agriculture’s Rural Development, are all known for their borrower-friendly features. These include lower down payments and more flexible eligibility criteria. By exhibiting growth, albeit at a more sluggish rate, it proves that these loans are similarly partaking in the recent credit availability surge.
Of note too is the reverse mortgage market. After a period of contraction, this market saw growth for the first time in January, indicating an optimistic turn of events. Reverse mortgages, sometimes referred to as Home Equity Conversion Mortgages (HECM), enable homeowners of age 62 and above to convert part of their home equity into cash. Unlike a traditional mortgage where monthly payments are required, the loan balance of a reverse mortgage grows over time as monthly payments are not a pre-requisite. Such a loan can provide income in retirement but the accompanying costs and fees should be carefully considered.
Combining all these factors, it is clear that the increased MCAI throws light on the lenders’ approach to meeting diverse borrowing needs. More importantly, against the backdrop of the ongoing pandemic situation which has greatly influenced the housing market and the overall economy, a surge in the MCAI is a hopeful sign.
Outside of the pandemic context, this development also calls for an acknowledgment of the immense influence wielded by technology in the mortgage industry. The digital revolution has brought forth online applications and document verification, automated underwriting, and more, all of which streamline the loan approval process, increasing efficiency and reducing the time to closing.
However, while eased credit accessibility underscores the flexible and responsive nature of the housing market, it is also a two-sided coin. With relaxation in lending standards come risks, such as a rise in the number of mortgages that can fail and create a domino effect within the sector. This calls for a balanced strategy where the increased credit availability coexists with robust risk management practices to ensure the long-term health and stability of the housing market.
In conclusion, the increase in mortgage credit availability depicted by January’s MCAI is a testament to the evolving character of the mortgage market, reflecting responsiveness to the fluctuating financial landscape. It is an affirmation of the preparedness and resilience of the industry, especially needed in these unpredictable times. On one hand, this opens doors for a broader spectrum of borrowers, making homeownership feasible for many. On the other hand, it necessitates a meticulous balance with regulations to mitigate the risks involved. As we move further into the year, it will be interesting to watch how these trends evolve, shaping the future of the mortgage industry.
