Mortgage credit offerings at loosest in over two years

Growth in loan products across the board in anticipation of the annual home purchase season pushed mortgage credit to its loosest in over two-and-a-half years, the Mortgage Bankers Association said.

However, rate lock activity fell nearly 6% in May from April, as conforming mortgage rates rose over 16 basis points during the month, a separate Optimal Blue report noted.

The MBA's Mortgage Credit Availability Index increased 2.1% in May to 105.1 as the various components reached levels not seen in years. The upturn follows two consecutive months where the index was at 102.9. In May 2024, the MCAI was at 94.1.
 

"Credit supply increased to its highest level since August 2022, driven by growth in the supply of both conventional and government loans, as lenders offered a greater variety of loan types to support the spring homebuying season," said Joel Kan, vice president and deputy chief economist, in a press release.

The conventional MCAI was at its highest since June 2022, up by 1.6 compared with April.

"The jumbo index rose by 2.1% over the month to the highest level since February 2020, as lenders increased their jumbo loan offerings in May and growth in [non-qualified mortgage] loan programs continued," Kan said. The other part of the conventional index, for conforming loans, only rose 0.5%.

What is causing rate lock volume to slow

But the lock data for May is finding homebuyers are reluctant to forge ahead.

The Optimal Blue Market Volume Index was at 102 for May, which was a 5.9% month-to-month drop. Along with the monthly fall, the index was down 5.3% compared with May 2024.

May's purchase MVI of 86 was virtually unchanged from April but down 8.6% from a year ago.

Refinancings made up 16% of May's lock volume, down 504 basis points from the prior month. Cash-out activity was 10% lower than in April, while rate-and-term was 44%, although both were higher compared with May 2024.

The Optimal Blue expanded Market Advantage report noted bank statement loans made up 34.3% of non-QM rate lock activity, down 283 basis points from one year prior, while investor/debt service coverage ratio locks were at 27.5%, 46 basis points lower.

"All other" non-QM loan types were up 329 basis points from May 2024, at a 38.4% share.

What is happening with government-guaranteed programs

The MBA's Government MCAI reached its highest level since November 2023, up 2.9%. "Last month's increase in the government index was driven by more offerings of FHA and VA [adjustable rate mortgage] loans, along with streamline refinance loan programs," Kan said.

Optimal Blue's rate lock data showed government and nonconforming activity all increasing year-over-year, although for Federal Housing Administration and Department of Veterans Affairs loans, the share was down versus April

Conforming mortgages made up 51.9% of rate locks in May, up 92 basis points from the prior month, but down by a whopping 532 basis points compared with May 2024.

Nonconforming volume was up 339 basis points from the prior year to a 16.4% share, FHA, up 123 basis points to 19.7% and VA rose 57 basis points to 11.4%.

How first-time home buyers are affected

"Rising mortgage rates are squeezing borrower affordability, while tighter spreads are putting pressure on lenders in the secondary market," said Brennan O'Connell, director of data solutions at Optimal Blue, in a press release. "With the brief window of affordability relief now closed, the new data shows first-time buyers are feeling the strain, with modest declines in their share of conforming and FHA loan locks."

First-time homebuyers made up 68% of FHA locks, down 2% month-to-month, and 42% of conforming locks, down 1%; for VA, this was up 1% from the prior month to a 48% share of locks.