Mortgage Loan Credit Risk Up in Q2

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Mortgage loans originated in the second quarter of 2017 were slightly riskier than new loans made in the second quarter of 2016. The data were released Thursday morning by property information and research firm CoreLogic in the company’s quarterly report dedicated to its Housing Credit Index (HCI).

The average credit score for home buyers rose nine points year over year in the second quarter from 736 to 745. In the quarter, the share of buyers with credit scores under 640 had dropped to 2%, compared with about 25% in 2001. Quarter over quarter, the average credit score rose by four percentage points.

The HCI for the second quarter of 2017 rose 20 points year over year to 117, still within range of the index for 2001 to 2003, a timeframe that is considered to be a normal baseline for credit risk.

The HCI measures credit risk on six metrics: credit score; debt-to-income ratio; loan-to-value ratio (LTV); 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.

Frank Nothaft, chief economist at CoreLogic, said:

Mortgage risk for new originations increased modestly in the second quarter of 2017, but much of this rise was due to a small shift in the mix of loan types to more investor and condominium loans, which have slightly higher risk attributes. Despite the somewhat higher risk of new origination loans, purchase mortgage underwriting remains relatively clean with an average credit score of 745 and low delinquency risk.

Debt-to-income ratios remained unchanged year over year at 36%. LTVs decreased by nearly two percentage points to 85.5%. In the second quarter, the share of homebuyers with an LTV greater than or equal to 95% had increased by almost half compared with 2001.

CoreLogic also noted the following data points:

  • The investor share of purchase loans rose 0.6 points to 4.2% in the second quarter.
  • Condo/co-op loans rose 1.5 points to 11.1%.
  • Low- and no-documentation loans ticked up 0.2 points to 1.7% of the mortgage market.

The full report is available at the CoreLogic website.