Loans Originated in The Third Quarter Were Higher in Credit Quality Than One Year Ago

• CoreLogic’s Housing Credit Index (HCI) found mortgage loans originated during the third quarter of 2016 continued to exhibit low credit risk versus the previous quarter and one year earlier.
• The average credit score for homebuyers increased 5 points between the third quarter of 2015 and the third quarter of 2016, rising from 734 to 739.
• The average DTI for homebuyers fell slightly comparing the third quarters of 2015 and 2016, falling from 35.7 percent to 35.4 percent.
• The LTV for homebuyers decreased nearly 1 percentage point between the third quarter of 2015 and the third quarter of 2016, declining from 86.8 percent to 85.8 percent.

Loans originated in Q3 2016 are among the highest-quality home loans originated since the year 2001, according to the latest CoreLogic Housing Credit Index (HCI) Report.¹ Figure 1 shows the overall Housing Credit Index from Q1 2001 through the end of Q3 2016. Higher index values indicate a higher level of credit risk for new originations and lower index values indicate less credit risk present. Compared with other loans made since mid-2009, the starting point of the current economic expansion, Q3 2016 loans are among the loans originated with the lowest credit risk based on six important credit-risk attributes.

The decline in the HCI over the last four quarters has been primarily caused by lower credit-risk characteristics of new refinance loans (Figure 2). In Q3 2016, the HCI for purchase loans was about the same compared to the previous three quarters whereas the HCI for refinance loans had declined each quarter. With the mortgage rate most likely to increase next year, we expect a rise in the share of purchase loans and less influence of refinance loans on overall HCI compared to the current period. An increase in the number of purchase loans may introduce more mortgage fraud risk in 2017 because, contrary to refinancing, purchase transactions involve a new owner and more parties and documents, which offers more opportunities for fraud.

Figure 3 plots the six indicators used to calculate the HCI for prime conforming conventional purchase-money loans. The blue hexagon represents an index of credit-risk attributes in the benchmark period (average of 2001 and 2002 set equal to 100 for each attribute) and the red polygon represents characteristics of loans made in Q3 2016 relative to the benchmark. The share of borrowers with credit score less than 640 and the low- and no-doc share were down significantly compared to the 2001-2002 benchmark period. The share of new loans with LTV of 95 percent or higher was slightly above the benchmark period. The share of loans with DTI at-or-above 43 percent was about 80 percent of the share during 2001 and 2002. In contrast, the non-owner occupied borrower share was about 30 percent higher than the benchmark period and the condo & co-op share was slightly above the benchmark level.

Note for Figure 3: The share of loans made during 2001 and 2002 with the credit-risk attribute shown on the axis is set equal to 100.

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