Mortgage originations grew safer in the fourth quarter of 2016, according to CoreLogic, a global property information, analytics and data-enabled solutions provider.
Mortgage became less risky in from the year before, according to the Q4 2016 CoreLogic Housing Credit Index. This is consistent with the low credit risk from the third quarter and the highest quality home loans originated since 2001.
The index measures variations in home mortgage credit risk attributes over time, including borrower credit score, debt-to-income ratio and loan-to-value ratio. A rising HCI indicates that new single-family loans have more credit risk than during the prior period, while a declining HCI means that new originations have less credit risk.
“Mortgage loans closed during the final three months of 2016 had characteristics that contribute to relatively low levels of default risk,” CoreLogic Chief Economist Frank Nothaft said.
“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,” Nothaft said. “Refinance borrowers typically have a lower LTV and DTI than purchase borrowers.”
But this influx in refinances may have much less of an effect on the next quarter’s index as interest rates rise.
“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 said.
“As this occurs, we should observe our index signaling a gradual increase in default risk,” he said. “The evolution to a more purchase-dominated lending mix is also likely to increase fraud risk.”
During the quarter, the average credit score for homebuyers increased four points annually to 737. The share of homebuyers with credit scores under 640 hit one-tenth of those in 2001. The DTI average remained at 36% during the fourth quarter. And LTV for homebuyers increased less than 1% from last year to 87.1%.