Stricter Mortgage Standards and Declining Loan Availability Impact Borrowers

The mortgage industry has experienced a significant shift in recent months, making it increasingly difficult for borrowers to obtain a mortgage. Along with the rising mortgage rates, the Mortgage Bankers Association (MBA) reports that credit availability in July hit its lowest level since 2013. This decline in credit availability indicates that lending standards are tightening further, creating additional challenges for prospective homeowners.

Among all loan types, jumbo loans suffered the most significant drop in availability. Jumbo loans are loans that exceed the loan limits set by Fannie Mae and Freddie Mac and, as such, are usually held on bank balance sheets. However, banks are facing liquidity issues, making it difficult for them to hold onto these non-conforming loans. As a result, there has been a decline in availability and an increase in the challenges faced by borrowers seeking jumbo loans.

The combination of higher mortgage rates and stricter lending standards has led to a significant decline in mortgage demand. The MBA’s recent weekly survey revealed that mortgage applications for home purchases are down by 26% compared to the previous year. Additionally, refinance demand has plummeted by 32%. These figures highlight the impact that the changing lending landscape is having on borrowers, as many are deterred by the unfavorable market conditions.

As origination volumes decline and profitability suffers, lenders are responding by narrowing their loan product offerings. In an effort to reduce operational costs, lenders have become more selective in the types of loans they provide to borrowers. This reduction in available loan products further restricts borrowers’ options and makes it even more challenging to secure financing for a home.

One major factor contributing to the overall drop in credit availability is the decline of cash-out refinance programs. As mortgage rates have increased, borrowers are reluctant to trade a low-interest rate for a much higher one, particularly when refinancing for the purpose of extracting cash from their homes. Instead, borrowers are turning to alternative options such as home equity lines of credit (HELOCs), which serve as second liens.

The tightening of lending standards and the decrease in mortgage availability have severe implications for borrowers. Those looking to purchase a home face limited options and may find it increasingly difficult to qualify for a mortgage. Additionally, homeowners who had planned on refinancing for various reasons, including cash-out, are now left with fewer viable options. These changes in the mortgage landscape are creating significant challenges for borrowers at a time when they may need financing the most.

As the mortgage industry continues to navigate this period of change, borrowers must be prepared to face stricter lending guidelines and reduced loan availability. Prospective homebuyers should closely monitor their credit profiles, proactively address any outstanding issues, and explore all available loan options. Additionally, existing homeowners should carefully assess the feasibility and long-term costs associated with refinancing or utilizing alternate sources of funding. With the current market conditions, it is essential for borrowers to be well-informed and proactive to overcome the challenges presented by the evolving mortgage landscape.


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