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Q4 Mortgage Credit Risk Low

Risk likely to increase

March 21, 2017

By Mortgage Daily staff



It's been 16 years since the quality of residential loans originated has been as low as it was in the fourth-quarter 2016. But higher risk is likely ahead.

Based on the Housing Credit Index, single-family loans had less credit risk during the final quarter of last year than three months earlier and a year earlier.

In fact the index, which considers six credit risk attributes, indicates that fourth-quarter 2016 loans were among the highest-quality loans originated since 2001.

CoreLogic Inc. reported the index Tuesday.

Dr. Frank Nothaft, chief economist at the Irvine, California-based company, explained in the report that the reduced risk in the recent period was impacted by a large refinance share.

But with interest rates recently rising, the mortgage lending environment is in transition.

"Refinance volume will decline with higher mortgage rates, and lenders generally will respond by applying the flexibility in underwriting guidelines to make loans to harder-to-qualify borrowers," Nothaft stated in the announcement. "As this occurs, we should observe our index signaling a gradual increase in default risk. The evolution to a more purchase-dominated lending mix is also likely to increase fraud risk."

Credit scores averaged 737 in the fourth-quarter 2016, rising from 733 in the final three-month period of 2015. The share of borrowers whose scores were less than 640 was only a tenth of the share in 2001.

At 36 percent, debt-to-income ratios were was little changed from the fourth-quarter 2015.

The report said the loan-to-value ratios climbed 87.1 percent in the latest quarter from 86.7 percent a year prior. The share of loans with LTV ratios of at least 95 percent was up by a quarter compared to 2001.

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