Mortgage Credit Risk in U.S. Upticks in 2017

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CoreLogic's Q1 2017 CoreLogic Housing Credit Index is now reporting a relative increase in credit risk for new home loan originations in the U.S. compared to prior periods. The six attributes are: borrower credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), investor-owned status, condo/co-op share and documentation level.

In Q1 2017, the HCI increased to 105.6, up 3.6 points from Q1 2016. Even with this increase, the level of credit risk in Q1 2017 is nearly the same as the average of 105.9 for the period of 2001 to 2003, a time frame that is considered to be a normal baseline for credit risk. The slight loosening in the credit index during the past year was partly due to a shift in the mix of purchase versus refinance originations because purchase loans exhibit higher risk attributes than refinanced loans.

Beginning in Q1 2017, the HCI was revised to include a more comprehensive source of loan-level, non-agency, mortgage-backed securities data. The result is that the HCI more accurately captures the loans that exhibited higher risk features during the mid-2000s.

"Mortgage rates during the first quarter of 2017 were up about 0.5 percentage points from a year earlier," said Dr. Frank Nothaft, chief economist for CoreLogic. "Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues."

Nothaft also observed that investor activity and condo/co-op lending had increased in Q1 2017. "Overall credit risk for purchase loans was slightly higher compared with a year ago as the investor share and condo/co-op share increased. These increases offset lower-risk signals from the credit score, DTI and LTV attributes to result in an uptick in overall riskiness. Still, overall risk is similar to that of the early 2000s."

HCI Highlights as of Q1 2017:

• Credit Score: The average credit score for homebuyers increased 7 points year over year between Q1 2016 and Q1 2017, rising from 734 to 741. In Q1 2017, the share of homebuyers with credit scores under 640 was less than 3 percent compared with 25 percent in 2001.

• Debt-to-Income: Holding steady at 36 percent, the average DTI for homebuyers in Q1 2017 was similar to Q1 2016. In Q1 2017, the share of homebuyers with DTIs greater than or equal to 43 percent was 24 percent, down slightly from 25 percent in Q1 2016, but up from 18 percent in 2001.

• Loan-to-Value: The LTV for homebuyers fell by 1.7 percentage points between Q1 2016 and Q1 2017 from 87.6 percent to 85.9 percent. In Q1 2017, the share of homebuyers with an LTV greater than or equal to 95 percent was 43 percent, down from 49 percent in Q1 2016 and up from 29 percent in 2001.

• Investor Share: The investor share of home-purchase loans increased from 4 percent in Q1 2016 to 5 percent in Q1 2017.

• Condo/Co-op Share: The share of home-purchase loans secured by a condominium or a co-op building increased from 10 percent in Q1 2016 to 12 percent in Q1 2017.

• Documentation Type: Low- or no-documentation loans remained a small part of the mortgage market, increasing from 2 percent to 3 percent of home-purchase loans during the past year.