Mortgage lenders are taking increased credit risks similar to those of the early 2000s, according to the Q1 Housing Credit Index Report [1] released by CoreLogic [2] on Tuesday. The level of credit risk taken by lenders in Q1 of 2017 was about the same as the average risk taken between 2001 and 2003.
According to the report, the shift toward riskier lending standards is a result of declining refinances.
“The slight loosening in the credit index during the past year was partly due to a shift in the mix of purchase versus refinance originations because purchase loans exhibit higher risk attributes than refinanced loans,” CoreLogic reported.
According to Frank Nothaft, CoreLogic’s Chief Economist, increasing mortgage rates also played a role in the looser lending practices over the last quarter.
“Mortgage rates during the first quarter of 2017 were up about 0.5 percentage points from a year earlier,” Nothaft said. “Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than- perfect credit scores, require more documentation or have unique property issues.”
CoreLogic’s Housing Credit Index, or HCI, takes into account borrower credit score, loan-to-value and debt-to-income ratios, investor-owned status, condo/co-op share of purchases, and level of documentation. According to the report, credit scores have increased over the year, rising 7 points between Q1 2016 and Q1 2017. Debt-to-income ratios were stable, LTV ratios dropped by 1.7 percent over the year, and investor share of purchase loans inched up just 1 percent.
Condo/co-op share rose 2 percentage points over the year—another factor that, according to Nothaft, played a role in the riskier credit standards as of late.
“Overall credit risk for purchase loans was slightly higher compared with a year ago as the investor share and condo/co-op share increased,” Nothaft said. “These increases offset lower-risk signals from the credit score, DTI, and LTV attributes to result in an uptick in overall riskiness. Still, overall risk is similar to that of the early 2000s.”
The HCI came in at 105.6 for the quarter; the average between 2001 and 2003 was 105.9 The 2001 to 2003 period is considered the “normal baseline for credit risk,” according to CoreLogic’s methodology.