Want a home loan these days? Increasingly, your credit needs to be almost perfect.
Mortgages continued to concentrate among the least risky U.S. households in the first quarter with almost 61 percent of new home loans going to borrowers with a credit risk score of 760 or above, according to a report published Wednesday by the New York Federal Reserve Bank. That's a record in a data series that goes back to 2003, when the share was around 30 percent.
The quarterly report draws on the regional Fed's consumer credit panel, a national sample based on Equifax data. Its credit scores, which businesses use to determine whether a borrower will pay their bills on time, ranges from 280 to 850.
There are many reasons why this concentration is happening. There's the well-known story of younger people struggling under the weight of hefty student loans, which gets factored into debt-to-income ratios when they apply for mortgages.
Also, house prices have risen sharply. In November, a national home-price index tracked by S&P CoreLogic Case-Shiller surpassed the housing-boom peak of 2006 and in February reached the highest level in data going back to 1987. Both developments swing home-buying power to an older generation of borrowers with established incomes, lower debt levels, and enough savings to make down payments.
"Home prices have gone up, and the loans people are getting are much bigger with lower down payments, and the people who get them have to have the income to support that," said Alanna McCargo, co-director of the Washington-based Urban Institute's Housing Finance Policy Center.
That said, the report also underscores that lenders are still risk-averse when it comes to the housing market, the epicenter of the 2008-2009 financial crisis. Put another way, the trauma of the worst financial shock since the Great Depression still echoes almost a decade later, with banks operating under much stricter regulations designed to prevent a similar bubble inflating in the future.
To get a sense of how credit to other types of borrowers has slowed to a trickle, consider that the share of originations in the 660-719 credit score range fell to 15.1 percent from 16.3 percent the previous quarter, the New York Fed's data showed.
The economic context of this trend is also important. U.S. unemployment fell to 4.4 percent in April, the lowest level since 2007. The economic expansion, which began in mid-2009, is on track for another year of growth and incomes are starting to creep higher. The Fed's monetary policy is still very loose, with the benchmark lending rate in a target range of 0.75 percent to 1 percent. If credit isn't filtering down to riskier borrowers now, when will it?
The distributional effects of this combination of tighter regulatory oversight and increased risk aversion by both households and lenders is hard to ignore. When credit isn't flowing down to higher-risk borrowers, it typically affects minorities the most. The homeownership rate for black households stood at 42.7 percent in the first quarter, according to Census data, down 5.3 percentage points over the past decade. That compares with a 3.5-point drop for whites.
McCargo said that the Urban Institute's studies also show the rate is falling across all demographic groups within the black community.
"It will have a generational impact," she said.