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Acceptable Risks

LendingMortgage Credit underwriting has eased over the past year according to an analysis by CoreLogic [1], which compared the underwriting during Q2 2018 with a year earlier.

The analysis found that mortgage credit underwriting had eased for both conventional and Federal Housing Administration (FHA) home purchase loans in this period, with FHA underwriting standards being more relaxed than conventional loans in terms of credit requirements.

In a blog [2], Archana Pradhan, Senior Professional, Economist, Office of the Chief Economist, CoreLogic further analyzed the averages of three key factors in mortgage underwriting—debt-to-income (DTI), loan-to-value (LTV), and credit scores. She also analyzed the trend at the highest risk spectrum—the share of loans with very high DTI and LTV and those with low credit scores.

Based on this analysis, Pradhan wrote that the average DTI for conventional loans had risen steadily since mid-2013 and had started to rise sharply after Fannie Mae raised its DTI ratio level from 45 to 50 percent in July 2017. Between the second quarter of last year and this year, the analysis found that the DTI ratio for conventional loans had risen to almost 37 percent.

The DTI for FHA loans had risen in a similar manner and reached its highest level in 14 years during Q2 at 43 percent, from 42 percent during the same period last year.

"The share of loans with DTI ratio above 45 percent has increased for both the conventional and FHA products. For conventional loans, it rose sharply after Fannie Mae’s move," Pradhan wrote. "The share, holding steady at between 5 percent to 7 percent from early 2012 up to Fannie Mae’s announcement, had reached 20 percent in Q2 2018. Similarly, the share of FHA loans with a DTI ratio above 45 percent had increased to 38 percent in Q2 2018."

Though the average LTV for FHA loans remained steady at around 96-97 percent, it rose steadily from 76 percent in Q2 2010 to 82 percent in Q2 2o18.

According to Pradhan, Historically, FHA has played a key role in opening access to credit, with the average credit score. for homebuyers with an FHA loan being lower than for those with conventional loans. And while the average credit score for FHA loan borrowers has seen a steady decline from 709 in 2011 to 681 by 2018, those for conventional loan borrowers has remained relatively unchanged within the 758-763 range since 2009. " Looking at the high-risk tail, the share of borrowers with a credit score less than 640 is just 1 percent for conventional loans compared with 18 percent for FHA loans originated in Q2 2018," Pradhan said.