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Shift Towards Investor, Refinance Loans Leads to Higher Credit Risk

Credit risk in Q3 2017 increased due to a shift in the purchase loan mix to more investor loans and a shift in the refinance loan mix to borrowers with lower credit scores and higher debt-to-income (DTI) ratio according to CoreLogic’s Q3 2017 Housing Credit Index (HCI) released on Tuesday. In Q3, the HCI increased 111.1, up 18 points from 93.1 in Q3 2016 remaining within the HCI benchmark range of 90-121.

The HCI measures trends in six home mortgage credit risk attributes and indicates the relative increase or decrease in credit risk for new home loan originations compared to prior periods. The six attributes include borrower credit score, DTI, loan-to-value ratio (LTV), investor-owned status, condo/co-op share and documentation level.

“The CoreLogic HCI is up compared to a year ago, in part reflecting a shift in the mix of loans to the purchase market, which typically exhibit higher risk. Looking forward to 2018, with continuing economic and home price growth, we expect credit-risk metrics to rise moderately,” Dr. Frank Nothaft, chief economist for CoreLogic said.

The report noted that while credit score for homebuyers increased seven points year over year between Q3 2016 and Q3 2017, rising from 739 to 746, the share of homebuyers with credit scores under 640 was 2 percent compared with 25 percent in 2001, indicating that the Q3 2017 share was less than one-tenth of the share in 2001.

In terms of DTI, the report said that, the average DTI for homebuyers in Q3 2017 was unchanged from Q3 2016 at 36. In Q3 2017, the share of homebuyers with DTIs greater than or equal to 43 percent was 22 percent, down slightly from 24 percent in Q3 2016, but up from 18 percent in 2001.

The LTV for homebuyers dropped by almost 2 percentage points year-over-year from 86.4 percent in Q3 2016 to 84.9 percent in Q3 2017 according to the report which also indicated that the share of homebuyers with an LtV greater than or equal to 95 percent had increased by almost one-third in 2017 compared with 2001.

While the investor share of home purchase loans increased to 4.4 percent in Q3 2017 from 4 percent in the year ago period, the share of home purchase loans secured by condominiums or co-op buildings increased to 11.5 percent in Q3 2017 from 10 percent in the year ago period.

The report noted that low or no-documentation loans remained a small part of the mortgage market in 2017.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, 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 Dallas, Texas. You can contact her at [email protected].

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