The idea that mortgage credit is strong and stable couldn’t be more misleading. Many assume that tighter regulations since the 2008 crisis have made the system foolproof, but that belief rests on shaky ground.
When you break down the numbers, it becomes clear that mortgage quality is not as solid as the experts claim.
Credit Scores Aren’t What They Seem to Be
People point to higher credit scores as proof of improved mortgage quality. According to the latest data from Spring 2024, the average FICO score for new mortgages is 734. That is up from around 700 in 2008, which sounds like a big improvement. But here is the catch. It is not real.
During COVID, reporting for loan delinquencies was paused, and direct financial aid temporarily boosted household finances. The result? Credit scores shot up. The Consumer Financial Protection Bureau found that, on average, FICO scores rose by 11 points in early 2020. The biggest jumps came from borrowers with the lowest scores, some increasing by nearly 20 points.
Photography / Pexels / Major housing downturns in the 1950s, 1970s, and 1980s all occurred when home equity levels were just as high.
In addition, regulatory changes have artificially inflated scores. The removal of medical debt from credit reports alone added an estimated 25 points to consumer FICO scores. What this means is that a 740 credit score today is not the same as a 740 in 2008. The system hasn’t created better borrowers. It has simply changed the way risk is measured.
Home Equity Won’t Save the Market
Another argument for mortgage stability is that homeowners have record-high equity. The Federal Reserve estimates that as of early 2024, the average homeowner holds 71% equity in their property. That sounds reassuring, but history tells us it is not enough to prevent a housing crisis.
Having equity doesn’t guarantee financial stability, especially when economic conditions shift. The Savings and Loan Crisis of the 1980s is a perfect example - despite solid home equity levels, the market still collapsed.
More importantly, total equity is not evenly distributed. The average homeowner may be in good shape, but trouble starts at the margins. A housing crisis doesn’t begin with the typical homeowner. It starts with those who are highly leveraged. In 2008, total home equity never went negative, yet millions still ended up underwater. The same imbalance is happening again today.
Loan-to-Value Ratios Are Rising
If mortgage quality were truly strong, borrowers would be putting down more money upfront. Instead, the numbers tell a different story. The median loan-to-value (LTV) ratio for new mortgages is now 95%. Before the 2008 crash, it was closer to 80%.
SHK / Pexels / A higher LTV ratio means borrowers are entering homeownership with less of a cushion.
If home prices drop even slightly, they could find themselves underwater fast. Worse, appraisal values are being pushed higher due to government-backed lending policies.
When prices cool down, many of these borrowers will be left exposed.
Debt-to-Income Ratios Are Reaching Dangerous Levels
Perhaps the most alarming trend is the rise in high debt-to-income (DTI) lending. More than a third of all new mortgages today have a DTI above 45%. That means a large share of borrowers are spending nearly half of their income just to service their debt.
This is happening despite regulations under the Dodd-Frank Act that were supposed to ensure borrowers had the "ability to repay." Add in rising property taxes and insurance costs, and homeowners are under more financial strain than ever. The moment interest rates tick up, or the job market softens, these high-DTI borrowers will be in serious trouble.
