Follow Insights Blog

CoreLogic

CoreLogic Econ

LATEST CORELOGIC ECON TWEETS

Far Fewer Low Credit Score Applicants Than Before Housing Crisis

If Credit Underwriting Has Tightened, Why Have Denial Rates Fallen?

Archana Pradhan    |    Mortgage Performance

Compared with a decade ago, single-family home-purchase originations have declined significantly. There were 11.7 million loan applications for single-family home-purchase mortgages in 2005, which plunged to 3.6 million in 2011 (lowest in the decade), and rose to 4.6 million in 2014. The decline in number of applications from 2005’s peak to 2014 represents an overall drop of 60 percent (Figure 1). Similarly, the number of loan originations to purchase a single-family home dropped from 7.4 million in 2005 to 3.2 million in 2014. During this period the denial-rate for home-purchase loan applications dropped to 13.2 percent in 2014 and was 8.1 percentage points lower than its peak of 18.7 percent in 2007. Could this be the result of a decline in applications from riskier applicants?

Our previous blog on CoreLogic’s Housing Credit Index illustrated that mortgage credit availability today, based on an analysis of six factors, is still far less than during 2001-2002.[1] But if credit standards are relatively ‘tight’ today, shouldn’t the denial rate be higher than it was in 2005 and 2006?

Borrower Credit

Borrower Credit

One of the key factors used in mortgage underwriting as well as in our Housing Credit Index is the credit score. The average borrower credit score for home-purchase originations has increased from roughly 700 in 2005 to almost 750 in 2015 (Figure 2). In 2005, the credit score for the first percentile ranged from 520 to 540 and showed a dramatic rise during the Great Recession, and is currently running in a range of 620 to 630. By just gazing at the borrowers’ credit scores, one could conclude that mortgage originations were constrained as a result of tight underwriting standards. But how has loan demand changed, particularly for the borrowers with relatively low credit scores? The origination volume is the end result of an interplay between loan applicants’ demand and lenders’ risk tolerances. Is there a way to disentangle mortgage credit supply conditions from mortgage demand?

Credit Score

Credit Score

An answer is shown in Figure 3, which shows how the credit score distributions have shifted from 2005 to 2015 for both applications and originations. The share of applications and originations with less than a pristine credit score has declined. The difference is more pronounced for applications than for originations. The share of credit scores below 700 for applications has declined and has been offset by a greater share of credit scores above 740. From a credit space perspective, the similarity of the two density distributions for 2015 suggests that lenders are largely meeting the demand of borrowers applying for a loan. Thus, the observed decline in originations could be a result of potential applicants being either too cautious or discouraged from applying, more so than tight underwriting as the culprit in lower mortgage activity. Consumers are cautious more than they have been in the past and thus self-sidelining of cautious/discouraged consumers makes it appear as if credit is tightening. The policy prescriptions are quite different if the drop in originations is attributable to a lack of demand more than to tight underwriting. For example, more consumer education such as counseling and financial literacy programs could be as or more successful in raising origination levels than introducing new lending products with lower credit standards.

©2016 CoreLogic, Inc. All rights reserved.