Credit Quality: It’s Getting Better All the Time

For mortgage originations, things are beginning to look a lot like they did before the bubble—at least when it comes to credit quality and risk level.

CoreLogic’s new Housing Credit Index (HCI), which measures risk attributes such as credit score of the borrower and DTI and LTV ratios, found that the mortgage loans originated in the third quarter of 2016 were not only less risky than those originated in the same quarter a year ago, but were the highest quality of originations in 15 years.

“As the U.S. entered its eighth year of economic recovery this past summer, we continued to see mortgage originations with relatively low credit risk and this pattern will likely continue into 2017,” CoreLogic Chief Economist Dr. Frank Nothaft said.

The average borrower credit score for loans originated in Q3 2016 jumped by 5 points over-the-year, from 734 to 739, according to CoreLogic. The average borrower DTI fell from 35.7 to 35.4 over-the-year in Q3, and the average DTI dropped from 86.8 down to 85.6, according to CoreLogic.

The percentage of borrowers with credit scores of 640 or less had declined by three-quarters compared with 2001, CoreLogic reported. For the lowest 1 percent of borrowers with home purchase loans, the average credit score increased from a range of 490 to 510 up to 622 to 624 in the third quarter of 2016.

“The index incorporates six risk attributes, including the three Cs of underwriting—credit, collateral, and capacity. Using 2001 originations as a base year, the HCI shows the significant loosening of credit running up to 2006. This was followed by a dramatic tightening of credit in response to the real estate crash and a decline in high-credit-risk applicants beginning with the Great Recession,” Nothaft said. “While low downpayment and high payment-to-income products are available today, borrowers generally need good credit scores to qualify. This may be a factor that has led to the drop-off in applications from those with lower credit scores during the last few years.”

Click here to view CoreLogic’s complete report.