Falling Rates Equals Falling Credit Availability

Falling Rates, Falling Credit Availability by ToddSullivan, ValuePlays

I’ve been saying this for a while, higher rates will lead to expanding credit which will further aid economic expansion. Continued low or even falling rates will further restrict credit and retard it. As the 10yr falls, so does credit availability.  Slowly rising rates would be a nice economic benefit right now

Mortgage credit availability decreased in October, according to the Mortgage Credit Availability Index (MCAI), a report from the Mortgage Bankers Association (MBA), which analyzes data from the AllRegs® Market Clarity® product.

Credit Availability

The MCAI decreased 2.5 percent to113.2 in October. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of a loosening of credit. The index was benchmarked to 100 in March 2012.

“The major cause of the decline in the credit index in October was the removal of special loan programs which only pertain to REO sales. These programs were likely discontinued due to the shrinking level of REO properties for sale on the market,” said Mike Fratantoni, MBA’s Chief Economist. “FHFA recently announced plans regarding efforts to expand access to conventional conforming credit through greater clarity with respect to repurchase risk and a modest expansion of higher LTV lending. These changes are not yet finalized and hence are clearly not reflected in the October data.”

NEW CONVENTIONAL AND GOVERNMENT COMPONENT INDICES

Last month, MBA began reporting on two additional measures of credit availability as part of the monthly MCAI release: the Conventional Mortgage Credit Availability Index and the Government Mortgage Credit Availability Index, with historical data back to 2011.

Credit Availability

The Conventional and Government MCAIs, which are component indices of the Total MCAI, are constructed using the same methodology, and are designed to show relative credit risk/availability for conventional and government (FHA/VA/USDA) loan programs. The difference between the component indices and the total MCAI is first, the population of programs they examine, and second, the “base levels” to which they are calibrated. Using data from the MCAI and our Weekly Applications Survey, MBA calibrated the Conventional and Government indices to better represent where each index might fall in March 2012 (the “base period”) relative to the Total= 100 benchmark.

Both the Government MCAI and the Conventional MCAI decreased in October. The Government MCAI decreased less than one percent going from 248.0 to 246.0, while the Conventional MCAI decreased 5 percent from 85.2 to 80.9.

EXPANDED HISTORICAL SERIES

The Total MCAI has an expanded historical series which gives perspective on credit availability going back 10 years (expanded historical series does not include new Conventional or Government MCAI). The expanded historical series covers 2004 through 2010, and was created to provide historical context to the current series by showing how credit availability has changed over the last 10 years – this includes the housing crisis and ensuing recession. Data prior to March 31, 2011, was generated using less frequent and less complete data measured at six-month intervals and extrapolated in the months between for charting purposes.

Credit Availability

MBA has partnered with AllRegs® to produce monthly MCAI, which feeds current mortgage underwriting parameters into a single index number to capture whether overall mortgage credit is more or less available from month to month.




About the Author

valueplays
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.