It’s no secret that the lending standards in the U.S. were too lax in the years leading up to the 2008 financial crisis. Banks and other lenders issued loans to borrowers who simply didn’t have the means to repay them, resulting in catastrophic consequences for both borrowers and lenders alike.
You might be worried we’re heading for a housing crash, but there are many reasons why this housing market isn’t like the one we saw in 2008. One of which is how lending standards are different today. Here’s a look at the data to help prove it.
Every month, the Mortgage Bankers Association (MBA) releases the Mortgage Credit Availability Index (MCAI). According to their website:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”
Basically, the index determines how easy it is to get a mortgage. Take a look at the graph below of the MCAI since they started keeping track of this data in 2004. It shows how lending standards have changed over time. It works like this:
- When lending standards are less strict, it’s easier to get a mortgage, and the index (the green line in the graph) is higher.
- When lending standards are stricter, it’s harder to get a mortgage, and the line representing the index is lower.
In 2004, the index was around 400. But, by 2006, it had gone up to over 850. Today, the story is quite different. Since the crash, the index went down because lending standards got tighter, so today it’s harder to get a mortgage.
Loose Lending Standards Contributed to the Housing Bubble
One of the main factors that contributed to the housing bubble was that lending standards were a lot less strict back then. Realtor.com explains it like this:
“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.”
The tall peak in the graph above indicates that leading up to the housing crisis, it was much easier to get credit, and the requirements for getting a loan were far from strict. Back then, credit was widely available, and the threshold for qualifying for a loan was low.
Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan. That means creditors were lending to more borrowers who had a higher risk of defaulting on their loans.
Today’s Loans Are Much Tougher To Get than Before
As mentioned, lending standards have changed a lot since then. Bankrate describes the difference:
“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”
If you look back at the graph, you’ll notice after the peak around the time of the housing crash, the line representing the index went down dramatically and has stayed low since. In fact, the line is far below where standards were even in 2004 – and it’s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:
“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”
The decreasing index suggests standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.
It’s no secret that the lending standards in the U.S. were too lax in the years leading up to the 2008 financial crisis. Banks and other lenders issued loans to borrowers who simply didn’t have the means to repay them, resulting in catastrophic consequences for both borrowers and lenders alike.
Fortunately, we’ve learned our lesson since then, which is why the lending standards in 2021 are much stricter. Banks now generally require borrowers to have higher credit scores, larger down payments, and more stable incomes than before. This ensures that lenders are only extending loans to those who can actually afford them and reduces the chances of taking on too much risk.
Lenders must also assess each borrower’s overall financial situation when deciding whether or not to offer a loan. This includes taking into account the borrower’s debt-to-income ratio, employment history, and other factors to get a better picture of their ability to repay it.
By following stricter lending standards, banks are able to avoid making the same mistakes they did during the financial crisis and help borrowers make smart decisions when it comes to borrowing money. This helps create a more stable and secure economy for everyone involved.
Although the lending standards may not seem as lenient as they once were, they are still designed to be fair and reasonable for both borrowers and lenders alike. By setting appropriate guidelines and thoroughly assessing each borrower’s situation, lenders can ensure that all loans are issued responsibly without putting themselves at too much risk.
No one wants to experience the hardships of another financial crisis, so it’s important that lenders continue to uphold these lending standards to prevent a similar situation from occurring in the future. This will help ensure a more stable and secure economy for everyone involved.
Bottom Line
Leading up to the housing crash, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. This goes to show, that these are two very different housing markets, and this market isn’t like the last time.
Steve Schappert Founded, and is the broker at Connecticut Real Estate, Schappert owns The Connecticut Art Gallery and Home & Art Magazine Steve also designed, built, and shipped a zero-energy double-walled home to Germany. Schappert is an abstract painting artist and has painted, renovated and provided energy audits for over 1300 homes.
When it comes to real estate, construction and energy efficiency, Steve Schappert is one of the most sought-after experts in the field. With more than 40 years of experience in these areas, he has become a trusted source for reporters looking for insights on the industry. From helping develop net-zero homes to advising on sustainable building practices, Schappert’s knowledge and expertise is unrivaled. Whether it’s for a news article or an in-depth magazine story, reporters turn to Steve Schappert as a reliable source of information. With his expertise and guidance, they can ensure that their stories are accurate and up-to-date.
In the last year I have been interviewed by ABC News Manhattan, Connecticut Magazine and featured in 2 articles in The Washington Post.
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