Default risk remains low for both refinance and “purchase-money” mortgages, according to new data from the CoreLogic research firm — but it’s largely because post-crisis restrictions have led to more rejections, or caused less-qualified applicants to select themselves out of the market entirely.
CoreLogic’s proprietary Housing Credit Index clocked in at 44 during the fourth quarter of 2016, down from the same point in 2015 and significantly below its bubble-era highs of the mid-120s in 2006. The higher the number, the greater the default risk; the index is set at a baseline of 100, recorded back in 2001.
Of course, the lack of risk for lenders stems from the significantly tighter restrictions on mortgage lending that emerged from the Great Recession and the mortgage-backed securities crisis: CoreLogic found that the lowest 1% of those applying for purchase loans — traditionally considered “subprime” borrowers — had median credit scores of 628 in the fourth quarter of 2016, up significantly from the wild-west days of yore. By comparison, the lowest 1% of buyers had credit scores from 490 to 510 back in 2001.
Top-tier “super-prime” borrowers in the 99th percentile have seen relatively little change over time, with their credit scores hovering just above 800 for the 15 years that CoreLogic has tracked such data.
The Irvine, Calif.-based CoreLogic digs into credit and mortgage data from all 50 states and the District of Columbia to develop its index, which takes into consideration loan-to-value rate, debt-to-income ratio, documentation type, and occupancy status in addition to credit scores.
The nation’s capital took the prize for highest average credit score among purchase-money borrowers at a whopping 754; California, New York, New Jersey, and Hawaii followed close behind, with Garden and Aloha State borrowers averaging a score of 745.
Bringing up the rear was Mississippi, where the average borrower needed a score of 720 to obtain a purchase-money loan. Indiana, Kansas, North Dakota, and Georgia rounded out the bottom five.
“Mortgage loans closed during the final three months of 2016 had characteristics that contribute to relatively low levels of default risk,” CoreLogic chief economist Frank Nothaft said in the report. “While our index indicated somewhat less risk than a quarter and a year earlier, this partly reflects the large refinance share of fourth quarter originations,” he continued, noting that refi applicants generally have lower loan-to-value and debt-to-income ratios than those taking out purchase mortgages.
Nothaft predicted a coming rise in default risk, as higher mortgage rates deter “safer” refinance candidates and the mix shifts to include a greater proportion of purchase loans.
“Lenders generally will respond by applying the flexibility in underwriting guidelines to make loans to harder-to-qualify borrowers,” he said. “As this occurs, we should observe our index signaling a gradual increase in default risk.”
Written by Alex Spanko