It no question that a big cause of the 2009 recession was the sub prime mortgages banks were practically giving away. After the collapse there was a lot of talk of moral hazard, and the banks playing fast and lose with everyone’s money. With the bailouts came tighter regulation, sub prime mortgages disappeared and it borrowing standards became tighter. Now almost five years later it appears that standards are beginning to lighten up.
Mortgage production has stalled, and aside for a quarter at 2011, is lower than its ever been since 2009. In response the banks have began to lower the borrowing standards. Is this the first step back down a slippery slope or are the banks regaining confidence in the market?
After an initial pass through of the article I believed that this was the start back down a slippery slope. The banks were making less money than used to and saw a way to profit by lowering borrowing standards. It seemed all to familiar, the banks trying to make more and more money by making riskier bets. It wasn’t a sub prime mortgage but it looked like the start of them returning. After the initial read I did some research on historic mortgage rates to see just how risky the banks were being.
To start I looked at the average credit scores for those new mortgages over the past ten years. As you can see from the chart below, scores below 620 were accepted at a rate of almost 10% around the collapse. After, it took about a minimum score of 640 to be accepted for a mortgage. No banks have a standard credit score when evaluating candidates, however it is unlikely that banks are going back to the 620 standard seen before.
Another piece of information for evaluating how stringent banks are being is the percent down payment they require on each loan. Down payments vary depending on other factors but after the housing collapse banks were requiring as much as 20% down on homes. In the past year rates have been dropping below 10% and some lenders are moving below 5%, with a good credit score that is. These numbers don’t seem very different than those in 2009 when the housing market collapsed.
So it may seem that banks are loosening their standards. However this isn’t something that is anywhere as risky as the sub prime mortgages of 2009. The banks are remaining stricter on the credit scores to ensure that the loans aren’t defaulted on. So with the banks lowering standards, it is likely a better sign of a strong economy over a moral hazardous financial industry.