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Mortgage credit declines ahead of new qualified mortgage rules

Brent Nyitray, CFA, MBA

The Mortgage Credit Availability Index measures the mortgage credit supplied to the market

The Mortgage Credit Availability Index is compiled by the Mortgage Bankers Association and AllRegs, and it focuses exclusively on mortgage credit. Most other lending indices focus on credit availability in general. The index is relatively new, and has only existed since the worst of the housing bust. It’s indexed at 100 in September 2010. A higher reading means mortgage credit is more available, while a lower number means tighter mortgage credit. The baseline reading of 100 should not be taken as “normalcy.” It represents a very tight mortgage market. The Mortgage Bankers Association ran a simulation of what the index might have looked like during the go-go days of the housing bubble, and it worked out to be 800 or so. This was due to the plethora of low-doc, no-doc, stated income, and interest-only loans. So a normal mortgage market would be somewhere between 100 and 800.

(Read more: Homebuilders breathe a sigh of relief as mortgage rates fall)

Mortgage credit is tightening ahead of the new qualified mortgage (or QM) rules

Starting January 1, the new rules put out by the Consumer Financial Protection Bureau kick in, which places bright lines around what the agency considers ability to repay, and also limits points and fees on loans. The QM rules were intended to provide some sort of safe harbor from borrower lawsuits, but the unintended consequence has been that lenders are reluctant to originate non-QM loans. The big bright line with QM loans is the debt-to-income limit of 43%. If a borrower’s income is below that level, they’ll be able to sue the lender for making a loan they knew the borrower wouldn’t be able to repay. Some lenders are doing non-QM loans, but they’re requiring lots of home equity. No one is considering a loan with a loan-to-value ratio over 70%. A second wrinkle of QM is that the points and fee cap of 3% make loans with principal amounts under $100,000 more or less money losers for the originators, given the fixed costs of making a loan and the tail liability risk.

(Read more: How the government shutdown will affect homebuilders)

Effects on homebuilders

Credit availability is a big driver of earnings for builders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), PulteGroup (PHM), and D.R. Horton (DHI). In fact, both Lennar and KB Home mentioned tight credit as an issue during their recent earnings calls. Credit is becoming easier to get at the high-priced jumbo levels, provided the borrower has equity in the home. This benefits the luxury builders like Toll Brothers.

(Read more: Bernanke’s comments send mortgage rates screaming higher)

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