Mortgage Credit Risk Edges Up Slightly; Credit Defaults at Five-Month Low

CoreLogic, Irvine, Calif., said mortgage credit risk ticked up slightly in the first quarter but noted it remains at “normal” baselines for such risk.

In a separate report, Equifax, New York, said its S&P/Experian Consumer Credit Default Indices fell by four basis points, to 0.86%, a five-month low, even as the bank card default rate rose 18 basis points from April to 3.53%, increasing for the seventh consecutive month.

The CoreLogic first quarter Housing Credit Index increased to 105.6 in the first quarter, up 3.6 points from a year ago. But CoreLogic noted even with this increase, the level of credit risk in the first quarter is nearly the same as the average of 105.9 for the period of 2001 to 2003, a time frame that is considered to be a normal baseline for credit risk.

CoreLogic attributed the slight loosening in the credit index during the past year in part to a shift in the mix of purchase versus refinance originations because purchase loans exhibit higher risk attributes than refinanced loans.

“Mortgage rates during the first quarter of 2017 were up about 0.5 percentage points from a year earlier,” said Frank Nothaft, chief economist for CoreLogic. “Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues.”

Nothaft noted investor activity and condo/co-op lending increased in the first quarter. “Overall credit risk for purchase loans was slightly higher compared with a year ago as the investor share and condo/co-op share increased,” he said. “These increases offset lower-risk signals from the credit score, DTI and LTV attributes to result in an uptick in overall riskiness. Still, overall risk is similar to that of the early 2000s.”

Other report highlights:

–The average credit score for homebuyers increased 7 points year over year, rising from 734 to 741. The share of homebuyers with credit scores under 640 was less than 3 percent compared to 25 percent in 2001.

–Holding steady at 36 percent, the average debt-to-income ratio for homebuyers was unchanged from a year ago. The share of homebuyers with DTIs greater than or equal to 43 percent was 24 percent, down slightly from 25 percent a year ago, but up from 18 percent in 2001.

–Loan-to-value for homebuyers fell by 1.7 percentage points between from a year ago, from 87.6 percent to 85.9 percent. The share of homebuyers with an LTV greater than or equal to 95 percent fell to 43 percent, down from 49 percent a year ago and up from 29 percent in 2001.

–The investor share of home-purchase loans increased from 4 percent a year ago to 5 percent in the first quarter.

–The share of home-purchase loans secured by a condominium or a co-op building increased from 10 percent a year ago to 12 percent in the first quarter.

–Low- or no-documentation loans remained a small part of the mortgage market, increasing from 2 percent to 3 percent of home-purchase loans during the past year.

The HCI indicates the relative increase or decrease in credit risk for new home loan originations compared to prior periods. The six attributes are: borrower credit score, debt-to-income ratio, loan-to-value ratio, investor-owned status, condo/co-op share and documentation level.

Meanwhile, Experian said data through May showed auto loan defaults and first mortgage defaults both dropped five basis points, to 0.85% and 0.64%, respectively. The national bank card default rate for May set a 48-month high, with the highest default rate in the South over the other three census divisions it captures. The East South Central Census Region, comprising Kentucky, Tennessee, Alabama and Mississippi, has the highest bank card default rate.

Experian said four of the five major cities saw their default rates decrease in May. New York experienced the largest decrease, down nine basis points from April to 1.01%. Los Angeles reported 0.66% for May, dropping three basis points. Dallas came in at 0.67%, down two basis points from April. Miami was down one basis point from April to 1.29%. At 0.97%, Chicago was the only city reporting a default rate increase (up three basis points).

“Easy come, easy go: bank cards where borrowing money requires simply swiping a credit card are experiencing rising defaults, while defaults on other kinds of consumer credit which depend on paperwork are flat or down,” said David Blitzer, Managing Director & Chairman of the Index Committee with S&P Dow Jones Indices. “The default rate on first mortgage remains at 1%, lower than the pre-crisis period. Rising home prices and increases in the equity mortgage borrowers have in their home are helping lower default rates. One factor in the difference between rising bank card defaults and stable defaults on mortgages and autos may be the difference in interest rates: about 4% on mortgages and 4.4% on auto loans, compared to 12%-18% on bank card loans.”