Lending standards tightened in August amid a worsening economic outlook and signs of cooling in home-price growth.

The mortgage credit availability index (MCAI) fell marginally by 0.5% to 108.3 in August from the previous month, according to the Mortgage Bankers Association (MBA). A decline in MCAI, benchmarked to 100 in March 2012, indicates that lending standards are tightening while an increase in the index suggests a loosening of credit.

“Mortgage credit availability declined slightly in August, as investors reduced their offerings of ARM and non-QM loan programs,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. Kan added that some lenders continue to streamline their operations by dropping certain loan programs to simplify their offerings, with origination volume expected to shrink about 48% to $2.3 billion in 2022 from last year’s $4.4 billion. 

“With a worsening economic outlook and signs of cooling in home-price growth, the appetite for riskier loan programs has been reduced,” Kan said.

Conventional MCAI, which does not include loans backed by the government, decreased 1%, and Government MCAI, which examines FHA, VA and USDA loan programs remained essentially unchanged. Of the component indices of the Conventional MCAI, the Jumbo MCAI fell by 0.7% and the Conforming MCAI decreased by 1.2%. 

The drop in mortgage credit availability follows volatile mortgage rates that closed out August at 5.8%, according to Black Knight’s Optimal Blue OBMMI pricing engine before retreating in July. With the fifth interest rate hike expected this month following the Federal Open Market Committee (FOMC) meeting, the 30-year fixed rate jumped to 5.98% as of September 12. 

Offsetting the decline in mortgage credit availability decrease was a small increase in new Home Equity Line of Credit (HELOC), a revolving line of credit that allows borrowers to draw money against the credit line up to a preset limit. While tappable equity, defined as the amount a homeowner can borrow against while keeping a 20% equity stake, is expected to decline this quarter, it hit a record of $11.5 trillion in the previous quarter. 

“With aggregate home equity still at elevated levels, HELOCs could benefit borrowers who might want to give up on their current, low mortgage rate but do want to utilize their home equity to support other spending plans,” Kan said.

Amid a rapid decrease in mortgage originations, nonbank lenders have been capitalizing on climbing home equity, a space that was dominated by depository banks. 

In August, Rocket Mortgage and its wholesale arm Rocket Pro TPO started offering home equity loans and Guaranteed Rate introduced a digital HELOC. Companies that plan to roll out HELOC products include loanDepot and New Residential Investment Corp. 

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