Mortgages are safer now than they have been at any point in the last fifteen years, according to CoreLogic's new quarterly report, the Housing Credit Index, that measures variations in home mortgage credit risk attributes over time.
In the third quarter of 2016, mortgage originations exhibited low credit risk compared to the previous quarter and the third quarter last year. In fact, the loans originated in the third quarter are among the highest quality home loans originated since 2001.
“Mortgage originations over the past 15 years have exhibited a huge swing in credit tolerance, as shown in our Housing Credit Index,” CoreLogic Chief Economist Frank Nothaft said. “The index incorporates six risk attributes, including the three C's of underwriting—credit, collateral, and capacity.”
Click to Enlarge
“Using 2001 originations as a base year, the HCI shows the significant loosening of credit running up to 2006,” Nothaft said. “This was followed by a dramatic tightening of credit in response to the real estate crash and a decline in high-credit-risk applicants beginning with the Great Recession.”
CoreLogic's new report will analyze include borrower credit score, debt-to-income ratio and loan-to-value ratio. As the HCI rises, it will indicate single-family loan originations have more credit risk than during the previous period, and vice versa if the HCI declines.
The HCI for the third quarter shows the average credit score for homebuyers increased five points from last year to 739.
The average debt-to-income ratio fell slightly from last year’s 35.7% to 35.4% in the third quarter.
Finally, the loan-to value ratio fell just over one percentage point from last year’s 86.8% to 85.6% this year.
“While low down-payment and high payment-to-income products are available today, borrowers generally need good credit scores to qualify,” Nothaft said. “This may be a factor that has led to the drop-off in applications from those with lower credit scores during the last few years.”
Because of this trend, Nothaft points out many first-time homebuyers don’t believe they can get a mortgage.
“When we compare applications to closed loans, what we find is that lenders are originating the bulk of the applications that they are receiving, but the applications that are coming in tend to be from relatively high quality, low-risk applicants,” he said.
Although this report shows that credit is still very tight, a study from the OCC shows banks are now consistently loosening their credit standards every year as they slowly ease up from the strict standards set in place after the financial crisis.
The loosening, however, is by no means a return to the way banks did business in the run-up to the crisis, with underwriting practices remaining satisfactory for the past 12-month period, according to the Office of the Comptroller of the Currency’s 22nd Annual Survey of Credit Underwriting Practices.