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The housing market has been frozen since the COVID-era boom ended, with higher borrowing costs, limited supply, and elevated home prices mostly taking the blame.
But stricter lending rules put in place after the housing crash that sparked the Great Financial Crisis are also weighing on prospective homeowners, according to a study last month from the Pew Charitable Trusts.
“These changes helped to reduce delinquencies and defaults but also made it more difficult for many Americans to qualify for a mortgage,” wrote Adam Staveski, a principal associate with Pew’s housing policy initiative, in the study.
To be sure, the tighter standards reined in excesses during the housing boom, such as abuse of “liar loans” that required little proof of income. And today, default rates are at historic lows, due also in part to loss-mitigation tools like forbearance, loan modifications, and payment deferrals. Just 4%-5% of delinquent borrowers now default, down from 55% in the early 2000s, according to the study.
The impact has been felt especially among Americans with moderate credit scores of 600-699, many of whom still have the financial means to handle a mortgage. But lending to this group has plunged.
From 2005 to 2024, the share of mortgage originations that went to borrowers with a 600-699 credit score fell by 13.3 percentage points to 22.3%. In that same time, share of mortgage originations that went to Americans with a credit score of 700 or higher jumped by 24.9 percentage points.
“Although borrowers now take on more debt as a share of their income than ever before, they must have a pristine credit history to be approved for a loan,” Staveski said.
He pointed out that credit scores inherently reward borrowers with long credit histories and adequate financial cushions. The result is a close correlation between scores and age, income, and wealth.
That means the tighter lending environment disproportionately hits young adults entering the housing market, lower-income families, rural communities, as well as Black and Hispanic households, according to Staveski.
“Although some of these potential borrowers might not be financially prepared to take out a mortgage, others are excluded because of a thin or nontraditional credit history, or because the federal government’s credit standards are historically high,” he added. “While tighter standards have made the mortgage market safer, they have also made it harder for some qualified individuals to achieve homeownership.”
Meanwhile, the latest data on the housing market shows no signs that conditions are improving.
