CoreLogic: Credit Risk On Closed Loans Continued To Improve In Q4

Posted by Patrick Barnard on March 21, 2017 No Comments

Mortgage loans originated in the fourth quarter continued to exhibit low credit risk, as they did in the previous quarter, according to CoreLogic’s U.S. Housing Credit Index.

The level of credit risk was about the same as the third quarter and was slightly improved compared with the fourth quarter of 2015, according to the report, which measures risk on closed loans with respect to credit score, loan-to-value (LTV) and debt-to-income (DTI).

The report shows that in terms of credit risk, loans originated in the fourth quarter are among the highest quality since 2001.

The average borrower credit score in the fourth quarter was 737, up three points from the fourth quarter of 2015, when it was 734.

CoreLogic notes that in the fourth quarter, the share of home buyers with credit scores under 640 was about one-tenth of those in 2001.

The average DTI for home buyers in the fourth quarter was similar to the fourth quarter of 2015, at 36%.

CoreLogic notes that the share of home buyers with DTIs greater than or equal to 43% increased only slightly compared with 2001.

The LTV for home buyers increased by less than one percentage point, year over year, rising from 86.7% to 87.1%.

In the fourth quarter, the share of home buyers with LTVs greater than or equal to 95% had increased by more than one-fourth compared with 2001.

“Mortgage loans closed during the final three months of 2016 had characteristics that contribute to relatively low levels of default risk,” says Frank Nothaft, chief economist for CoreLogic, in a statement. “While our index indicates somewhat less risk than both a quarter and a year earlier, this partly reflects the large refinance share of fourth-quarter originations. Refinance borrowers typically have a lower LTV and DTI than purchase borrowers.”

Nothaft observed that mortgage rates have moved higher since November and are anticipated to rise even further during 2017.

“Refinance volume will decline with higher mortgage rates, and lenders generally will respond by applying the flexibility in underwriting guidelines to make loans to harder-to-qualify borrowers,” he says. “As this occurs, we should observe our index signaling a gradual increase in default risk. The evolution to a more purchase-dominated lending mix is also likely to increase fraud risk.”

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