Freddie Mac Data Shows Underwriting Policy Has Not Eased Too Much

Recently Freddie Mac released its fixed-rate, loan-level data to increase transparency into the agency’s mortgage practice¹. A new analysis from CoreLogic shows that underwriting policy has eased only a little bit since the depths of the financial crisis.

Fair Isaac Corporation (FICO) credit scores, loan-to-Value (LTV) ration and debt-to-income (DTI) ratio are three major factors lenders evaluate when underwriting a loan. Chart 1 shows the distribution of origination FICO scores across time. As we can see, the median origination FICO score shot up above 770 after the financial crisis and has eased slightly in the last three years, however, it still remains above 760.

Chart 2 shows the distribution of the origination LTV ratios over time. From Chart 2 we can see that the median origination LTV ratio reached a bottom in 2009, but has slowly increased since then and has nearly reached its pre-crisis levels in the last few years.

Chart 3 shows the distribution of DTI ratios over time. The DTI ratio declined significantly in the immediate aftermath of the financial crisis. However, unlike FICO and LTV, we have not seen lenders relax their requirements on DTI, indicating that borrowers’ ability to pay the loan is still under scrutiny.

The change in the underwriting policy, which is consistent with CoreLogic Housing Credit Index that tracks the availability of the credit and the riskiness of the loan originations², presents unique challenges for modeling and projecting the performance of loans originated at different time periods.

CoreLogic RiskModel Agency, which was calibrated on Fannie and Freddie’s published data sets, was used in this analysis to monitor the performance of agency loans³. More than 22 million Freddie fixed-rate loans originated from 1999 to 2015 are used in the CoreLogic analysis including with loan terms from 15 year, 20 year (both 15-year and 20-year term origination starting from 2005) and 30 year (origination starting from 1999). These loans include purchase and refinanced loans.

Chart 4 and Chart 5 show the conditional prepayment rate (CPR) and conditional default rate (CDR) for Freddie’s 2006 originations. The 2006 origination sample has the most active loans of any vintage and has experienced the bubble-burst and recovery period. The model’s predictions track what happened very well, even in that challenging environment. In chart 4, the effect of fixed-rate mortgage rates dropped and kept falling after mid-2010 sparked the jump and elevated rates on CPRs. In Chart 5, the Great Recession starting in June 2009 and home price plummet coincide with the spike in the CDR rates.

Ling Chen contributed to this analysis.

CoreLogic.com