Lending standards tighten due to high rates, worsening economic outlook

Mortgage credit availability index has fallen for eight straight months, reaching its lowest level since March 2013

Lending standards tightened in October, largely due to higher mortgage rates and the worsening outlook for the economy, the Mortgage Bankers Association (MBA) said.

The mortgage credit availability index (MCAI) fell by 0.5% to 102.0 last month, marking eight consecutive months of decline. This caused it to reach its lowest level since March 2013, according to the MBA. A decline in the index, benchmarked to 100 in March 2012, is an indicator that lending standards are tightening, while an increase suggests loosening credit standards.

“Lenders continue to reduce their capacity and are eliminating some loan offerings, including certain types of refinance loan products and others that require less than full borrower documentation,” Joel Kan, MBA’s vice president and deputy chief economist, said in a statement. 

With interest rates at a 20-year high, the refinance market is approaching its bottom, according to Black Knight’s latest origination market report

Rate lock volume dropped by more than 60% year over year, according to the MBA, and rate/term refis are down a staggering 92.6% compared to October 2021. 

With affordability remaining a thorn in the side of the housing market, adjustable-rate mortgages (ARMs) have become an attractive option for borrowers. In October, ARMs made up 13.1% of total lock activity, increasing from 11.3% in September.

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Credit tightening was most notable in the conventional and jumbo segments.

Conventional MCAI, which does not include loans backed by the government, decreased by 1.5%, and Government MCAI, which examines FHA, VA and USDA loan programs, increased marginally by 0.4%.

Of the component indices of the Conventional MCAI, the Jumbo MCAI fell by 2.5% and the Conforming MCAI remained flat.

According to on Mortgage News Daily, mortgage rates, which have been trending up with the Federal Reserve‘s interest rate hike, fell to 6.61% on Tuesday following a lower-than-expected consumer price growth in October. 

The consumer price index (CPI) rose by 7.7% year over year, marking the smallest 12-month increase since the year ending in January 2022.

With the bond and stock market rallying on the lighter-than-expected inflation, Federal Reserve Governor Christopher Waller on Sunday reiterated “we’ve still got a ways to go” before the US central bank stops raising interest rates.

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