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The Changing Rules of Mortgage Underwriting

UnderwritingUnderwriting is loosening for conventional conforming loans according to CoreLogic’s report on mortgage credit risk trends for the first quarter of 2018 released on Monday. The report also found higher debt-to-income (DTI) ratios during the quarter.

Credit scores along with DTI and loan-to-value (LTV) ratios are the three important factors in mortgage underwriting. “Recent credit loosening policies by the GSEs have helped boost higher DTIs and LTVs,” CoreLogic said in its blog on credit risk trends. According to the report, the share of new conventional conforming home purchase loans with DTI ratio over 45 percent rose sharply after Fannie Mae’s announcement to raise DTI ratio level from 45 to 50 percent in July 2017.

The share, that had held steady between 5 percent to 7 percent from early 2012 up to Fannie Mae’s announcement, had reached 20 percent in Q1 2018, the report indicated. The average DTI ratio for conventional conforming home-purchase loans rose by two points from Q1 2017 to Q1 2018 to almost 37 percent.

“The credit risk attributes of borrowers have shown dramatic variation in the last 18 years,” CoreLogic said. “Recent credit loosening policies by the GSEs have helped boost higher DTIs and LTVs.

The report indicated that the share of new conventional conforming home-purchase loans with LTV ratio above 95 percent started to rise in early 2015 after the announcement of changes to DTIs by the GSEs from less than 2 percent in 2014 to 9 percent in the first quarter of 2018. The average LTV ratio for home purchase loans during the quarter remained unchanged at 82 percent on a year-over-year basis.

On the other hand, the report said that while both DTI and LTV standards had relaxed, credit score standards had remained unchanged at an average credit score of 755 for homebuyers with conventional conforming home-purchase loans. When compared to the pre-crisis level though, the average credit score was found to be much higher. CoreLogic said that the average credit score of homebuyers was 705 in 2001, but “dramatically rose during the Great Recession and was 755 in Q1 2018.”

Another key difference between the credit-risk attributes during the pre-crisis era and the first quarter of 2018 was documentation of the high DTI/LTV loans. “In addition to high credit score standards, those high LTV/DTI loans in Q1 2018 were fully documented and are this different than the pre-crash high LTV/DTI loans, many of which were low- or no-doc loans,” the report said.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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