The recent increase in purchase originations has been driven primarily by high-credit borrowers, an analysis of purchase volume conducted by Black Knight Financial Services reveals.
Meanwhile, there has been a drop in the number of refinance originations among these same borrowers, indicating that prepay burnout from currently low interest rates is on the rise.
As refinance volume among both higher credit score and lower credit score borrowers decreases, leaving behind mostly purchase activity, which is concentrated among higher credit score borrowers, it shatters the illusion that credit is loosening, the firm says in its most recent Mortgage Monitor report.
In other words, it was the high volume of refinances that made it seem like credit was loosening. But looking at purchases separately, that's not really the case.
The firm's data shows that purchase originations increased 15% in the second quarter compared with the second quarter of 2014.
‘In June, we saw the highest level of purchase lending since June 2007 and early third quarter figures show purchase originations are up 11 percent from the same period last year,’ says Ben Graboske, senior vice president of Black Knight Data & Analytics, in a statement.
‘What's striking about this rise, though, is that it's being driven almost entirely by high-credit borrowers,’ Graboske says. ‘Year-over-year comparisons of purchase originations from sub-700 credit score borrowers show that purchase volumes from lower-credit borrowers are actually flat to slightly down from last year's levels. Only 20 percent of purchase loans originated in the past three months have gone to borrowers with credit scores below 700. That's the lowest level we've seen in well over 10 years. The weighted average credit score for purchase mortgages has also hit an all-time high of about 755.
‘At the same time, refinance originations have been steadily declining since March, signaling a degree of 'burnout' as those both interested and able to take advantage of currently low interest rates likely already have refinanced,’ Graboske adds. ‘We've also noticed that prepayment speeds – historically a good indicator of refinance activity – as well as refinance originations have been dropping most significantly among these same high-credit borrowers.
‘In contrast to purchase mortgages, we've seen average credit scores for refinance originations decline, which has some suggesting that credit is loosening for these products,’ he continues. ‘As these higher-credit borrowers – in many cases, 'serial refinancers' who have repeatedly taken advantage of drops in interest rates and their good credit standings – hit 'refi burnout,' and total originations decline, lower-credit borrowers make up a larger share of total volume, and weighted average credit scores for the total population naturally decline. It's not an indicator of loosening credit standards at all.’
Looking at mortgage performance, Black Knight found that as of the end of the third quarter, all but five states had seen reductions in their foreclosure inventories. As Graboske noted, one state's improvement stood out in particular.
‘As of the end of September, Florida had ended its eight-year reign as having the highest number of loans in active foreclosure in the U.S.,’ he says. ‘Over the past 12 months, the state has reduced its inventory of loans in active foreclosure by 43 percent. That's nearly twice the national average of 22.5 percent.
‘Florida, however, still has the largest number of properties 90 or more days past due but not yet in foreclosure,’ he adds. ‘New York – which has seen only a 19 percent reduction in its foreclosure inventory over the past year – has now taken Florida's place as the state with the most loans in active foreclosure.’
Foreclosure starts were up slightly in the third quarter, compared with the second quarter, driven by a rise in repeat foreclosure starts, the firms research reveals. Meanwhile, first-time foreclosure starts were at their lowest level in more than 10 years.
To view the full report, click here.