Purchase lending in the second quarter hit its highest level since 2007, according to Black Knight’s most recent Mortgage Monitor report.
About $467 billion in first lien mortgages, including both purchases and refinances, were originated in during the second quarter, an increase of 20% compared with the first quarter.
However, this was a decrease of 16% compared with the second quarter of 2016.
Refinances decreased 20%, or about $37 billion, compared with the first quarter. However, this was more than offset by a 57%, or $117 billion increase in purchase loans.
Refinances accounted for 31% of all mortgage originations, the lowest share since 2000.
“Purchase originations totaled $321 billion in the second quarter, up six percent from last year and the highest quarterly volume since 2007,” says Ben Graboske, executive vice president of Black Knight Data & Analytics, in the report. “As a result of growing average loan amounts for purchase originations, the total dollar amount of purchase originations is higher than averages seen from 2000-2003, prior to both the peak in home prices and the Great Recession that followed.
“This is partly due to rising home prices, but also comes as a result of an all-but-total absence of second lien usage for purchases, a shift toward high-dollar/low-risk loans among non-agency lenders and a higher share of cash purchases at the lower end of the market,” Graboske says.
Although purchase lending hit its highest level since 2007 does not mean purchase volume was anywhere near what it was that year. Black Knight points out that purchase volume in the second quarter was roughly 30% below the peak levels seen in 2000-2003.
Part of the reason is that many more borrowers have been shut out of the market due to stricter lending standards. Borrowers with credit scores of 720 or higher accounted for 74% of purchase loans in the second quarter, however, during the 2000-2003 period, only about 47% of borrowers had credit scores of 720 or higher.
Black Knight further notes that 65% fewer purchase mortgages are going to borrowers with sub-720 credit scores than the pre-crisis average.
“While overall purchase origination volumes are strong from a total dollar amount perspective, the market still does not appear to be performing at peak capacity,” Graboske says. “One key cause is the more stringent purchase lending credit requirements enacted in response to the financial crisis.
“Consider that borrowers with credit scores of 720 or higher accounted for 74 percent of all second quarter purchase loans as compared to a pre-crisis average of 47 percent,” he says. “Today, there are 65 percent fewer purchase loans being originated to borrowers with credit scores below 720 than in those years. The lack of credit availability for those borrowers is causing a strong headwind for the purchase market. Using 2000–2003 averages as a measure, as many as 645,000 purchase loans were not originated in the second quarter due to tighter lending standards. To put it another way, the purchase market is operating at less than two-thirds of peak capacity because of these factors.”