Mortgage Loan Credit Risk Rose in Q1

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Mortgage loans originated in the first quarter of 2017 were slightly riskier than new loans made in the first quarter of 2016. 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 for the first quarter of 2017 rose 3.6 points year over year to 105.6, roughly equal to the 105.9 average for 2001 to 2003, a period considered the normal baseline for credit risk.

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 seven points year over year in the first quarter, from 734 to 741. In the quarter the share of buyers with credit scores under 640 had dropped by about 25% compared with 2001.

Chief economist at CoreLogic, Frank Nothaft, said:

Mortgage rates during the first quarter of 2017 were up about 0.5 percentage points from a year earlier. Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues.

Debt-to-income ratios remained unchanged year over year at 36%. Loan-to-value (LTV) ratios decreased by 1.7 percentage points to 85.9%. In the first quarter, the share of homebuyers with an LTV greater than or equal to 95% had dropped to 43%, from 49% a year ago, but up from 29% in 2001.

Nothaft also commented on increased investor activity and condo/co-op lending in the first quarter:

Overall credit risk for purchase loans was slightly higher compared with a year ago as the investor share and condo/co-op share increased. These increases offset lower-risk signals from the credit score, [debt-to-income] and [loan-to-value] attributes to result in an uptick in overall riskiness. Still, overall risk is similar to that of the early 2000s.