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Continued Deterioration in Origination Quality

As home lenders and investors have recently been a little more relaxed about credit qualifications compared to just after the crisis, mortgage quality has weakened. Still, quality is better than before the crisis.

During the past three years, the quality of residential loans originated has weakened, though credit quality remains far stronger than the early 2000s and the late 1990s.

Components of borrower character like credit scores are the strongest feature of current mortgage originations, and they have weakened little over the past few years.

That is according to
As the credit cycle advances, mortgage origination quality remains broadly strong, but vulnerabilities are growing from Moody’s Investors Service.

“While an examination of originations across the five Cs of credit [character, capacity, collateral, capital and conditions] shows how their sources of strength have been narrowing, it also reveals a large number of credit positive attributes,” the report said. “These drivers of credit quality stem not from just decisions on underwriting guidelines or operational processes, but also from factors such as the nature of borrower demand.”

Borrowers’ capacity to afford housing payments based on income verification and variable-payment mortgages is strong. But there has been an increase in loans with high debt-to-income ratios.

Moody’s said that collateral has provided modest support for credit quality.

“Support for origination quality from practices related to collateral, such as loan-to-value ratios and appraisal quality, is at moderate levels,” the report said.

Capital-related factors like borrower reserves
appear to be at generally moderate levels.

The New York based ratings agency said that conditions have grown riskier.

“Origination quality is not receiving much support from the conditions surrounding the granting of loans,” the report said. “In particular, the risk of a weaker macro environment during the initial years after loan origination is building.”

Moody’s noted that the continuation of the recent weakening could lead to performance deterioration in loans and residential mortgage-backed securities.

But the direct effects on overall credit quality of new originations depends on issuers’ exposures to loan types with weaknesses.

The full 15-page report is available online at

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