The One Thing Policymakers Can Do to Loosen Credit

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NEW YORK (TheStreet) -- Mortgage credit conditions are tighter than they were even in the pre-bubble days and it is hurting the housing recovery and the economy.

In a new paper titled "Opening the Credit Box," noted Moody's Analytics economist Mark Zandi and Jim Parrott, a former White House policy adviser who is now with Urban Institute, argue that the pendulum has swung too far in the mortgage market and a balance needs to be struck between risk management and access to credit.

Tight credit conditions are most apparent in the average credit score of today's mortgage borrower.

The average score of households receiving purchase mortgage loans from government-sponsored enterprises Fannie Mae and Freddie Mac rose to a new high of 766 in June. That is 50 points over the average borrower credit score in the country. It is also 50 points higher than the average credit score on loans that were taken to purchase homes a decade ago, before the housing bubble.

Current FHA borrowers have an average credit score above 700, also about 50 points higher than in more normal times.

Meanwhile, none of the purchase borrowers this year had a credit score of less than 620, something that Zillow researchers also recently noted .

On a related note, TheStreet recently asked credit score provider FICO to share some of its data on credit score distribution. According to FICO, only 37% of the 200 million Americans that they currently score have a credit score over 750.

FICO data also traces the change in the distribution of credit scores for the average mortgage borrower since the bubble.

In October 2005, about 52% of the mortgage originations were made to borrowers with a credit score over 700. In October 2011, that ratio had jumped to 84%.

The authors say the credit box has tightened for several reasons. One, lenders have reassessed risks in the years since the crisis. They now recognize the higher costs of riskier lending -- the increased cost of servicing distressed borrowers, the reputational and legal risks associated with delinquent borrowers, to name a few.