Mortgage underwriting guidelines have loosened in the last couple of years. To expand the credit box to creditworthy borrowers, Fannie Mae began accepting mortgages with loan-to-value (LTV) ratios up to 97 percent in December 2014 and Freddie Mac in March 2015. To further expand access to credit, Fannie Mae raised its DTI ratio level from 45 to 50 percent in July 2017. DTI and LTV ratios along with the credit scores are three important factors in mortgage underwriting. This blog focuses on only conventional conforming (CC) home-purchase loans, which is a majority of the U.S. mortgage market.
The credit risk attributes of borrowers have shown dramatic variation in the last 18 years. Recent credit loosening policies by the GSEs have helped boost higher DTIs and LTVs. Figure 1 shows the share of new conventional conforming home-purchase loans with DTI ratio above 45 percent rose sharply after Fannie Mae’s move. The share, holding steady at between 5 percent to 7 percent from early 2012 up to Fannie Mae’s announcement, had reached 20 percent in Q1 2018. The average DTI ratio for CC home-purchase loans rose by two points from Q1 2017 to Q1 2018 to almost 37 percent.
Similarly, Figure 2 shows the share of new CC home-purchase loans with LTV ratio above 95 percent started to rise in early 2015 following the GSEs’ announcement. The share was less than two percent in 2014 but rose gradually and reached 9 percent in Q1 2018. The average LTV ratio for the home-purchase loans in Q1 2018 remained unchanged from Q1 2017 at 82 percent.
Though both DTI and LTV standards have been relaxed, there has been no change in credit score standards. Holding steady at 755, the average credit scores for the homebuyers with CC home-purchase loans in Q1 2018 was unchanged from Q1 2017. However, the average credit score was much higher than the pre-crises level. For example, the average credit score of homebuyers was 705 in 2001, but dramatically rose during the Great Recession and was 755 in Q1 2018. In addition to high credit score standards, those high LTV/DTI loans in Q1 2018 were fully documented and are thus different than the pre-crash high LTV/DTI loans, many of which were low- or no-doc loans.
Note: The share of loans made during 2001-2002 with the credit-risk attribute shown on the axis is set equal to 100.
Figure 3 compares the six indicators of underwriting and credit risk during a benchmark time period to where we are today for CC home-purchase loans. The blue hexagon represents an index of credit-risk attributes in the benchmark period (average of 2001-2002 set equal to 100 for each attribute) and the red polygon represents characteristics of loans made in Q1 2018 relative to the benchmark. The share of borrowers with a credit score less than 640 as well as the low- and no-doc share were both down significantly compared to the 2001-2002 benchmark level. In contrast, the shares of new loans with an LTV higher than 95 percent and with a DTI above 45 percent were 57 percent and 26 percent, respectively, higher than the benchmark level. The condo/co-op share was 15 percent higher than the benchmark level, while the investor-owned share was 11 percent higher than the benchmark level.
This data indicated that underwriting continues to be cautious but loosening slightly for conventional conforming home-purchase loans during the Q1 2018 than a year earlier and in early 2000s.
Learn more about what current lending trends mean for the future of the housing market at our premier client conference EPIQ, where CoreLogic Chief Economist Dr. Frank Nothaft will personally present his “Economic Outlook & State of the Housing Industry.”
 Conventional conforming loans are those that generally meet standards for sale set by Fannie Mae and Freddie Mac. Based on CoreLogic’s Public Records data for First Quarter 2018, these loans make about 70 percent of the all purchase-mortgage loans.
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