Tightening Credit A New Concern For The Mortgage Market

Recent bank failures have created another problem for the housing market: lack of credit.

First American’s Potential Home Sales Model– a measure of what a healthy level of home sales should be based on market fundamentals– fell by 2.5% month-over-month in March. Year-over-year, it is down 10.7%, a loss of more than 640,000 sales.

The biggest contributor to the decline was tightening credit standards, First American says. At the beginning of the pandemic, lenders reduced credit due to the increased likelihood of forbearance and delinquency, but it slowly began to ease.

Now, credit is tightening again thanks to banking uncertainty.

“There are fears that the recent bank failures will prompt lenders to be much more conservative with their lending,” said Mark Fleming, chief economist at First American. “When homeowners are less likely to qualify for a mortgage, they are more likely to stay in their current home or, for potential first-time home buyers, not buy one at all.”

Silicon Valley Bank was the biggest bank failure since Washington Mutual in 2008, holding around $209 billion in total assets and about $175.4 billion in total deposits. Its collapse sent a shock wave through the banking sector, leading to the breakdown of New York Signature Bank as well. Most banks are still moving carefully in their wake.

As a result, credit availability in March remained close to its tightest levels since 2013.

Government mortgage credit availability fell for the third time in four months, a blow for first-time and lower-income buyers.

Jumbo and non-conforming loans are most likely to be impacted by this, however, as only 18% of mortgages are held on bank balance sheets.

Fleming says residential sales are unlikely to be hindered by credit tightening, even if the mortgage market overall is sensitive to it.

“Affordability and lack of inventory remain the primary challenges to housing market potential. While credit conditions tightened in the March NFCI report, it’s unlikely that the recent banking crisis will materially impact residential mortgage availability,” he noted.