Borrowers With Low-Credit Most Negatively Impacted by COVID-19

AEI latest housing indicators show the market may be stabilizing but at a lower level. 

For the week of May 4, the purchase loan rate lock activity was 8% below what it was during the same week last year. The decline is less than the average decline of 15% over the past four weeks. 

Also stabilizing is home-price appreciation, which is nearing 4%—down from 7.2% during the prior week. 

The report also said the COVID-19 pandemic has most negatively impacted the jumbo market, potential FHA and VA borrowers with lower credit scores, potential buyers of investor homes, and the self-employed. 

AEI said cash-out refinancing activity has “decelerated” from the prior week, but continued to run above the pre-crisis period. 

For the week of May 4, the cash-out refinance was up 23% compared to the prior week. Annually, the rate of increase has also slowed, with the week of May 4 posting a 59% increase compared to the 112% rise the week prior. 

The report added that borrowers with the lowest FICO scores are less able to get mortgages as lenders are tightening standards. 

“The share of borrowers with a score below 640 has fallen from 10% to 5%. This tightening of lending standards is appropriate since the most leveraged borrowers tend to purchase late in a housing boom and are then likely to be among the first to default,” AEI’s report said. “At the same time, the highest quality borrowers are beginning to return to the market.”

The share of borrowers with a FICO score of 770 or higher had decreased from 31% to 28%, but that has bounced back to 31% over the past few weeks. 

However, the number of FHA borrowers with a credit score below 640 has dropped to 16% from 32%, with the declines being larger for those with credit scores below 620.

The share of borrowers with a credit score of 660-689 has increased from 23% to 30%.