Mortgage Loan Credit Risk Up Slightly in Q3

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Mortgage loans originated in the third quarter of 2017 were slightly riskier than new loans made in the same period last year. 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 third quarter of 2017 rose 18 points year over year to 111.1, still within range of the index for 2001 to 2003, a timeframe that is considered to be a normal baseline for credit risk. Quarter over quarter, the index dipped nearly six points.

The average credit score for home buyers rose seven points year over year in the third quarter from 739 to 746. 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 one percentage point.

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.

Chief economist at CoreLogic, Frank Nothaft, said:

The CoreLogic Housing Credit Index is up compared to a year ago, in part reflecting a shift in the mix of loans to the purchase market, which typically exhibit higher risk. Further, the index shows higher risk attributes for both purchase and refinance loans, although the risk levels still remain similar to the early 2000s. When looking at the two most recent quarters in which the mix of purchase and refinance loans were similar, the [HCI] for each segment remained stable. Looking forward to 2018, with continuing economic and home price growth, we expect credit-risk metrics to rise modestly.

Debt-to-income ratios remained unchanged year over year at 36%. Loan-to-value ratios decreased by nearly two percentage points to 84.9%. In the third 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 0.4 points to 4.4% compared with the third quarter of 2016.
  • Condo/co-op loans rose 1.5 points to 11.5%.
  • Low- and no-documentation loans ticked up 0.7 points to 2.2% of the mortgage market.

The full report is available at the CoreLogic website.