Q4 Mortgage Loan Quality Remains High, but Higher Interest Rates Could Increase Fraud Risk

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Mortgage loans originated in the fourth quarter of 2016 are among the highest quality home loans made since 2001. The data were released Tuesday morning by property information and research firm CoreLogic in the company’s quarterly report dedicated to its Housing Credit Index (HCI).

The HCI measures credit risk on six metrics: credit score; debt-to-income ratio; loan-to-value ratio; documentation level (full documentation of a borrower’s economic conditions or incomplete levels of documentation, including no documentation); occupancy (owner-occupied primary residence, second home or non-owner-occupied investment); and property type (whether property is a condominium or co-op). A rising HCI indicates increased credit risk while a falling index score means reduced credit risk.

The average credit score for home buyers rose four points year over year in the fourth quarter from 733 to 737. In the quarter the share of buyers with credit scores under 640 had dropped by about 90% compared with 2001.

Chief economist at CoreLogic, Frank Nothaft, said:

Mortgage loans closed during the final three months of 2016 had characteristics that contribute to relatively low levels of default risk. While our index indicates somewhat less risk than both a quarter and a year earlier, this partly reflects the large refinance share of fourth-quarter originations. Refinance borrowers typically have a lower LTV and DTI than purchase borrowers.

Debt-to-income ratios remained unchanged year over year at 36%. Loan-to-value ratios increased by less than one percentage point to 87.1%. In the fourth quarter, the share of homebuyers with an LTV greater than or equal to 95% had increased by more than 25% compared with 2001.

Nothaft also commented on rising mortgage loan interest rates:

Refinance volume will decline with higher mortgage rates, and lenders generally will respond by applying the flexibility in underwriting guidelines to make loans to harder-to-qualify borrowers. As this occurs, we should observe our index signaling a gradual increase in default risk. The evolution to a more purchase-dominated lending mix is also likely to increase fraud risk.