Did lending standards overcorrect after the financial crisis?
A recent Pew study argues that lending policies, which tightened in the late 2000s, are preventing many Americans from getting mortgages despite reduced risks.
Key points:
- A report from the Pew Charitable Trusts says credit score standards are overly stringent, and underwriting policies should be modernized to open up access to homeownership.
- Tighter lending standards introduced after the subprime crisis reduced delinquencies but also kept many first-time, low-income and minority buyers out of the mortgage market, Pew argues.
- However, some industry experts caution that significantly loosening existing standards could be risky for both the industry and would-be homeowners.
Twenty years ago, the subprime mortgage crisis and its fallout shook the country. The mortgage industry's response was to tighten lending standards to make sure it wouldn't happen again.
But the question today is, did the regulatory response go too far? Getting approved for a mortgage is no small thing for many Americans as housing costs and inflation continue to rise. But the mortgage lending standards set by the government and federal mortgage servicers Fannie Mae and Freddie Mac may also be hindering some would-be homebuyers, according to a study published in late August by the Pew Charitable Trusts.
Leaving buyers with moderate credit scores behind
Responding to the housing market crisis, policymakers worked to tighten lending standards between 2006 to 2013, the Pew report noted, and created stricter requirements across four categories: average credit score, debt-to-income ratio, loan-to-value ratio and the share of loans requiring little or no documentation of income.
The standards served to protect the mortgage industry and the government, but they have also made it more difficult for individuals with moderate credit scores (which Pew defines as 600-699) to get approved for a loan.
In 2000, banks and other lenders originated about 1.08 million purchase mortgages to applicants with credit scores between 601 to 660, but by 2025, just 293,000 of applicants with credit scores in that range were approved for mortgages. Pew notes that this significant decline can't be attributed to general improvements in average credit scores, as Americans' credit profiles have changed little over the past 25 years.
The report points out that many would-be borrowers with moderate credit scores are young people, first-time buyers, low- and moderate-income individuals, racial minorities and individuals who live in rural areas, suggesting that the tighter standards are having a disproportionate impact on those groups.
As of 2024, the average credit score of new mortgage borrowers was 742, the highest score on record and 29 points higher than the average credit score of all consumers in the country, Pew noted.
Time for a reassessment?
With mortgage delinquency and default rates at multi-decade and historic lows, Pew argues that it's time for policymakers to revisit current standards. The data suggests that "today's mortgage borrowers are more resilient than the borrowers of the mid-2000s," the report notes, and loss-mitigation programs established during the Covid era have reduced risks for borrowers with moderate credit scores.
The report presented Fannie Mae and Freddie Mac data showing a significant decline in default rates for borrowers with credit scores in the 620-700 range. From 2000-2004, 55% of seriously delinquent borrowers defaulted on their loans, according to the data. After the introduction of stronger mortgage loss-mitigation programs, that share fell to 5% during 2015-2019 and then to 4% from 2020-2024.
Standards still tightening
In August, the Mortgage Credit Availability Index (MCAI) decreased by 1% to 107.3, according to the Mortgage Bankers Association. That decline means that lending standards are getting more stringent, but the MBA noted that August's decrease was in part attributable to a reduction in jumbo credit availability.
Mortgage industry vet Melissa Cohn, who is regional vice president of William Raveis Mortgage, acknowledged in an email that lending standards "are definitely more restrictive than they were in the past," but said those restrictions have contributed to much lower delinquency rates.
Cohn added that the non-qualified mortgage (non-QM) lending sector has nonetheless become more "robust" over the years and has "opened up mortgages to many who don't meet the current FNMA and Freddie Mac guidelines mostly as it relates to income."
Even with this increase in non-QM options, the Pew report notes that loans to borrowers with credit scores of 600 to 699 are issued infrequently today, while in the past, lenders were able to serve that population with loan terms that included affordable payments and didn't cripple borrowers with unduly burdensome debt.
What policymakers can do
Affordable housing has been one area of focus for lawmakers in recent years, and provisions in the 21st Century Road to Housing Act are intended to help generate more mortgages under $100,000.
President Trump also issued an executive order in March on "Promoting Access to Mortgage Credit," which is intended to help smaller banks issue more loans and help low- and moderate-income borrowers have more viable options for mortgages.
But Pew argues that additional changes to federal lending programs, loan pricing frameworks and automated underwriting systems could help expand access to mortgages without any threat to the housing market or borrowers.
The organization said its future research will examine specific policy changes, but in the meantime, it urged policymakers to consider the report's conclusions when weighing policy proposals: overly stringent credit standards can stop qualified borrowers from being approved for a mortgage; traditional underwriting models should be reassessed and modernized; and greater transparency for how credit standards operate is needed.
Balancing restrictions with risk to lenders, homeowners
Making homeownership accessible to more people sounds like a good thing, but some industry experts caution that strict federal lending requirements were enacted post-financial crisis for a reason: to protect the mortgage industry, the federal government and homebuyers.
Sheila Bair, who was chair of the Federal Deposit Insurance Corp. from 2006 to 2011 and played a pivotal role in enacting reforms in the wake of the financial crisis, said that changing standards significantly could also be risky. "What we learned during 2008 is that you're not doing these homeowners any favors by putting them into a home they can't afford," Blair told The Washington Post this week.
Cohn said new guidelines that could open up mortgage qualification to more low- or moderate-credit score individuals "would be a great thing" — with a caveat:
"If it increases the delinquency rate of mortgages, lenders may not be willing to stick with those changes."