Home >> Daily Dose >> Credit Risk Drops as Rates Rise
Print This Post Print This Post

Credit Risk Drops as Rates Rise

The risk of default for mortgage loans has dropped, according to a report from CoreLogic. The Q4 2016 CoreLogic Housing Credit Index (HCI) released on Tuesday showed a decline, indicating that new originations have less credit risk. The current HCI shows mortgage loans originated in Q4 2016 exhibit low credit risk, consistent with Q3 2016 and tighter than in Q4 2015. Q4 2016 loans are among the highest-quality home loans originated since 2001.

HCI measures variations in home mortgage credit risk attributes over time, including borrower credit score, debt-to-income ratio (DTI), and loan-to-value ratio (LTV). The average credit score for homebuyers increased 4 points year-over-year between Q4 2015 and Q4 2016, from 733 to 737. The share of homebuyers with credit scores under 640 was one-tenth of those in 2001.The average DTI in Q4 2016 was similar to Q4 2015 at 36 percent, and thhe LTV for homebuyers increased by less than 1 percent in that time, from 86.7 percent to 87.1 percent.

“Mortgage loans closed during the final three months of 2016 had characteristics that contribute to relatively low levels of default risk,” said Dr. Frank Nothaft, chief economist for CoreLogic. “While our index indicates somewhat less risk than both a quarter and a year earlier, this partly reflects the large refinance share of fourth-quarter originations. Refinance borrowers typically have a lower LTV and DTI than purchase borrowers.”

As risk is reduced, CoreLogic indicates that home prices have continued to rise. Previously, the CoreLogic Home Price Index (HPI) showed nationwide sales, including distressed sales, jumped 6.9 percent year over year and 0.7 percent month-over-month. Mortgage rates have continued to rise as well, and are anticipated to continue to rise during 2017.

“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 continued. “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.”

About Author: Staff Writer

x

Check Also

Survey: Homeownership Remains Elusive for Baby Boomer Renters

A recent look into housing affordability by NeighborWorks America has found that three in five long-term baby boomer renters feel homeownership remains unattainable.