Underwriting Cautious but Loosening Slightly
Homeownership is often regarded as a foundation to build wealth that has been accessible to most of America’s families. Access to mortgage credit for prudent, responsible loan applicants – in other words, credit availability – is very important to support homeownership in a sustainable and responsible way.
The CoreLogic Housing Credit Index (HCI) was designed to measure the variations in credit availability. The HCI combines housing credit underwriting attributes, such as borrowers’ credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), level of documentation, occupancy status and loan origination channel over time, in order to determine the range and variation across multiple attributes and combine them into one single measure. These changes across different dimensions are reflected in the HCI. A rising HCI indicates increasing openness or loosening of credit attributes and a declining HCI indicates decreasing openness or tightening of credit attributes. Since 2001, credit availability has shifted from very loose during the years immediately preceding the Great Recession to very tight after the Great Recession.
The credit risk attributes of borrowers have shown dramatic variation in the last 15 years. Figure 1 shows that the average credit score of borrowers has increased from roughly 690 in 2001 to almost 750 in 2015. Figure 1 also shows credit scores by percentiles in order to understand the lower end of the profile, which is not transparent if only average scores are considered. For example, in 2001, the credit score for the first percentile ranged from 480 to 500, but dramatically rose during the Great Recession and is currently running in a range of 620 to 630. Yet, credit profile is not the only contributing factor to determine accessibility. Figure 2 compares the six indicators of underwriting and credit availability during a benchmark period (average of 2001 and 2002 purchase-money, first-lien mortgage originations) to where we are today. The share of credit score less than 640 is about one-fifth of where it was during the benchmark period. The broker share and low- and no-doc share have both dropped dramatically. In contrast, the non-owner occupied borrower share, the current LTV share above 95 percent and the DTI share above 43 percent are at or above the benchmark level.
In Figure 3, the HCI indicates that mortgage credit availability was comparatively unrestrained between 2005 and 2007 prior to the Great Recession. In response to the foreclosure crisis and severe recession, credit accessibility plummeted and is far less than any other time over the last 15 years. The horizontal band in Figure 3 represents the HCI range for the benchmark period (2001 and 2002).
Looking at the recent trend, the HCI for 2015 indicates an increase in credit availability, but still remains significantly tighter than it was during the benchmark period. The 2015 increase in HCI has been driven by a rise in the share of FHA loans and new affordable conforming loans. Starting in 2015, the Federal Housing Administration (FHA) reduced its annual insurance premium by 50 basis points and the FHA market share increased from 12 percent in 2014 to 16 percent in 2015. In December 2014, both Fannie Mae and Freddie Mac announced they would start buying 97 percent LTV conventional mortgages from lenders to expand access to low-down payment credit. Even though these recent acts by the FHA and government-sponsored enterprises (GSEs) may have helped increase credit availability to some degree, the overall HCI indicates that lending standards are still considerably tighter than during the benchmark period.
1The first blog on the HCI was posted on October 16, 2014.
2The National Bureau of Economic Research has identified the January 2008 through June 2009 period as an economic recession; see http://www.nber.org/cycles.html. This period is often referred to as the “Great Recession” in the U.S.
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