Residential lending standards 80% better than 2008?

[Kenny Simpson]

Residential lending standards have come a LONG way since the 2008 GREAT recession. It is much harder to qualify for a mortgage today than it was before the 2008 recession. Today 95% + of loans qualify show income in the form of tax returns, w-2, retirement income and reported self-employed income. There are alternatives to this, 12/24-month bank statements or maybe a DSCR loan on an investment property but those loans make up such a small percentage of the overall loans. Prior to 2008, the JOKE was “all you needed was a heartbeat and pen” to get a loan and unfortunately it was that easy to get a loan.

Today the average credit score, profile of the borrower, ability to repay, type of loan products and down payments are the BIG difference. The days of the options ARMS, teaser ARMS and basically the loans set to make a borrower fail have gone away.

85% of Americans have an interest rate of 5% of less and out of those mortgages about 95% of those are a fixed rate mortgage. Over 50% of those fixed rate mortgages are under 3%. Borrowers took advantage of the low rates and locked in low fixed payments and are sitting in a really good position.

Do you think this is helping the housing market avoid another CRASH?

Below I provided charts to show that lending standards are about 80% better.

The chart below what I wanted to point out was the private securitization loans, if you notice how they are such a small % today compared to back before 2008? Those are the loans that are created and sold on the secondary market, think of NON-QM loans today and before 2008 well those were ALL the loans that were very easy to get and had a BIG impact on hurting the housing market when the market had a correction.

The chart below shows a massive drop in ARM loans after 2008.

The chart below you can see the average credit score go UP since 2008 for mortgages.

[Danielle Malecek]

It's always worth looking backward to determine what went wrong then, and whether will it happen again. However, it's worth examining the unique position that we find ourselves in now. 

While all you really needed back then was a pulse to buy a house, now, in addition to tightened lending standards, we are also faced with a dramatically shifting economic backdrop. While signs point towards a recession (inverted bond yields, for example) growth and inflation remain strong (while less strong, of course, than just months ago), as does the general majority of emerging economic data. I don't believe we will see the Federal Reserve peeling back rates anytime soon (they are still raising rates after all), because of the aforementioned factors which they are trying to control. 

One thing that we haven't seen is a nearly 15-20 year period where 30 yr mortgage rates have hovered at or around 5%, followed by a period of soaring inflation. The federal reserve has indicated that their target "terminal rate" or when they'll stop raising rates, fluctuates based on inflation. 

What I wonder is how we will adapt to this new period of interest rates being significantly higher than an entire generation of people is used to experiencing. Even though lending standards have never been tighter, there is no calculation that builds in the reduced buying powers from borrowers who are spending more on interest than ever before, while the costs of basic goods like bread, eggs, and milk are also soaring in costs. 

I am not saying that we will experience the devastation that we did during the 2008-2010 crisis. We are far better prepared. But what I am seeing is that the future of the housing market is unpredictable, at best, based on these nuances which haven't been built into models or accounted for in other equations. These unknown accounted-for variables, if you recall,  played a significant role in the demise of the financial system over a decade ago. It's

safe to say that the lending world is much different now than its been, but how can we predict that what we haven't seen or experienced yet?