Capital Economics says that their reading of the market suggests that credit conditions are loosening, albeit very gradually, and that a loosening of credit conditions will help the sluggish recovery.
“As it becomes clearer that the housing and wider economic recoveries are strong enough to cope with a gradual rise in interest rates, lender caution should dissipate, helping to extend the recent recovery in the mortgage market,” says Andrew Hunter, assistant economist in a client note.
Home purchase mortgage applications have shown signs of improvement, rising by 22% since the turn of the year.
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(Source: Capital Economics)
“Although the strengthening labor market will continue supporting demand, extending the mortgage recovery will require a further easing in the tight credit conditions which have prevailed in recent years,” Hunter says. “In this respect, the following three trends provide some grounds for optimism.”
Notably, this is a position that has been strongly opposed by others in the lending industry, such as the prolific Logan Mohtashami, who says that the idea that credit is too tight is a myth.
Nevertheless, Hunter notes that first, a small majority of lenders also expect to ease standards further over the next three months.
“Second, the data seem to support lenders’ claims. Almost 70% of home purchase mortgage applications are now being approved – up from around 60% at the beginning of 2014,” Hunter said. “Admittedly, the average time taken to process applications has ticked up recently. But rather than being a sign that they are being scrutinized more carefully, this is more likely due to higher demand.”
Finally, he says, the average FICO credit score of successful applicants has now reversed the rise seen late last year.
“Admittedly, at 727 in June, it remains above the average American’s score of just below 700. But at least it is heading in the right direction once more,” he says.
“…(W)e think housing is well-placed to cope with a gradual rise in borrowing costs. As lenders’ confidence in the housing recovery grows, we would expect them to ease lending standards a little further,” Hunter said.