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Mortgage credit availability has declined considerably, reaching the lowest point it has reached in six years, according to the Mortgage Bankers Association (MBA). The Mortgage Credit Availability Index (MCAI) dropped to 120.9 in August, which is a 60.8 point decrease from August 2019 (181.7).

MCAI Trend (Source: Mortgage Bankers Association)

Joel Kan, the MBA’s Vice President of economic and industry forecasting, remarked that uncertainty around the job market and its future was likely to be the reason behind tightening credit. When lending standards become tighter, fewer mortgages are available and fewer still borrowers qualify for them. Specifically, borrowers with low credit scores and mortgages with higher loan-to-value (LTV) ratios are impacted. Kan continued, “A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

A decline in the MCAI means that lending standards are getting stricter, thereby making it much more difficult to get mortgages. Kan further attributed the reduction in credit supply to a reduction in supply from both conventional and government segments of the market. The government MCAI continued its tightening trend, decreasing by 1.4% from July 2020. The conventional MCAI took the biggest hit, dropping 8.7% on a month-to-month basis. Conforming products and the jumbo index experienced declines of 8.6% and 8.9% respectively. 

The government MCAI examines Federal Housing Administration, Veterans Affairs, and U.S. Department of Agriculture loan programs. The conventional MCAI examines non-government loan programs, and conforming and jumbo MCAIs are sub-components of the conventional MCAI. The conforming MCAI measures conventional loan programs that fall under conforming loan limits, while the jumbo MCAI measures programs that fall outside conforming loan limits.

“Jumbo credit availability has fallen 59% since the pre-pandemic months,” Kan added. “MBA’s Weekly Application Survey showed that jumbo mortgage rates stayed over 30 basis points higher than conforming rates in August, which is another indication of the reduced investor appetite for those loans.” 

The MCAI has experienced steady declines since the beginning of the year, despite record-low mortgage rates. In February, the MCAI dropped to 181.3, which marked the third consecutive month of tightening credit. The widespread impact of the COVID-19 pandemic on the economy only served to exacerbate the existing decline that had been prevalent in pre-COVID months. In March, the MCAI experienced a sharp decline to 152.1. Then, despite a slight increase to 126.9 in July, which marked the first increase in eight months, the MCAI has dropped again as lenders lose the confidence they gained over the summer.

MCAI Trend, December 2019 – August 2020 (Source: Mortgage Bankers Association)

Looking ahead, until concerns over the health of the job market are assuaged, mortgage credit availability remains less likely to improve.