The “Sanders Polynomial” Update: Mortgage Purchase Applications And Mortgage Rates (The Raising Of Credit Standards And Demise Of Non-vanilla ARMs Since Financial Crisis)

Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.

Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.

sanderspolynomial

Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.

mbAPudated.png

But the mortgage market has fundamentally changed since 2005-7.  First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.

mba620

So when the narrator at the end of the movie “The Big Short” said that nothing has changed,  that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished.  Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.

bbubblee

Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo.  My how times have changed.

But are lender credit standards too high? Or are lenders and investors low riding credit?

How about a spoonful of extra credit box expansion?

But let’s not turn back the credit clock too far!!

gsdad