Why It’s Smart To Keep Standards High

With home prices skyrocketing everyone is convinced the next housing crash is upon us. However, as I have written many times, there are substantial differences between 2021 and 2008. Occupancy levels are at historic highs and inventory is at historic lows. However, the biggest difference between 2008 and today is mortgage standards. The Wall Street Journal reported this over the weekend. (WSJ)

“About 70% of mortgages issued in 2020 went to borrowers with credit scores of at least 760, up from 61% in 2019, according to the Federal Reserve Bank of New York…The median credit score of borrowers approved for mortgages reached 786 in the fourth quarter of 2020, up from 770 during the same period in 2019.”

In 2008, the problem wasn’t so much low standards, but no standards at all. People were getting approved with zero documentation. Income and credit scores were of zero consequence. Thank goodness that is not the case in 2021.

Credit scores are undoubtedly a flawed system, but that doesn’t mean there isn’t some truth behind the numbers. People with higher credit scores are more likely to pay their bills compared to those with lower credit scores. This is evident today in a new piece in the Wall Street Journal about car loans. (WSJ)

“Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to credit-reporting firm TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019.”

A lot has been written about those being left behind in the current housing boom. While I do think we should encourage homeownership among all Americans, we also need to remember what happened last time we tried to make sure everyone could buy a home. We want to make sure everyone has equal access to credit, but we also want to make sure we are not extending credit to those who can’t afford the loan.

Remember, remember the year 2008…