Loans Originated in the Third Quarter Exhibit Higher Credit Risk Than a Year Earlier

• The CoreLogic Housing Credit Index (HCI) shows higher credit risk in Q3 2017 compared with Q3 2016, but it remained within the range exhibited during the early 2000s.
• The average credit score for all borrowers – purchase and refinance combined – slightly dropped year over year from 743 in Q3 2016 to 742 in Q3 2017.
• The average loan-to-value ratio (LTV) and debt-to-income ratio (DTI) for all borrowers rose for each by one point from Q3 2016 to Q3 2017 to 78 percent and 36 percent, respectively.

According to the CoreLogic Housing Credit Index (HCI), loans originated in Q3 2017 had higher credit risk than loans originated last year, but mortgage risk remains within the normal range of underwriting that was experienced in the early 2000s. Figure 1 shows the overall HCI including both home-purchase and refinance loans from Q1 2001 through the end of Q3 2017^[1]. Higher index values indicate a higher level of credit risk for new originations, while lower index values indicate less credit risk. The CoreLogic HCI measures mortgage risk along six important credit-risk attributes: borrower credit score, LTV ratio, DTI ratio, documentation level, investor-owned status and condo/co-op share.

The HCI increase from Q3 2016 to Q3 2017 stems from a higher share of loans for refinancing and for investors. In Q3 2017, the HCI for purchase loans was up year over year by 8 points due largely to a higher share of investor loans. The HCI for refinance loans increased year over year by 24 points from Q3 2016 (Figure 2). The bigger increase in the HCI for refinance loans over the last quarter was primarily caused by slightly higher credit-risk characteristics of new loans as a larger fraction of refinance loans were from FHA loans refinanced into conventional loans.[2]

Figure 3 plots the six indicators used to calculate the HCI for prime conforming conventional home-purchase loans. The blue hexagon represents an index of credit-risk attributes in the benchmark period (average of 2001-2003 set equal to 100 for each attribute) and the red polygon represents characteristics of loans made in Q3 2017 relative to the benchmark.[3] 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 2001-2003 benchmark level. In contrast, the shares of new loans with an LTV of 95 percent or higher and with a DTI at or above 43 percent were 21 percent and 35 percent, respectively, which is higher than the benchmark level. The condo/co-op share was 23 percent higher than the benchmark level, while the investor-owned share was similar to the benchmark level.

[1] CoreLogic began issuing its quarterly Housing Credit Index report for the Q3 2016 period. However, the methodology was revised in Q1 2017 to include a more comprehensive source of loan-level, non-agency, mortgage-backed securities data. (Please see the HCI Q3 2017 report for details.)

[2] See Sam Khater’s blog “FHA-to-Conventional Refinancing is a Bright Spot in the Mortgage Market”

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