While pundits and fusspots continue to wonder if we\’re headed for another housing bubble, think about this: The most recent mortgages were among the list of highest quality (lowest risk) since 2001.
Indeed, mortgages originated throughout the fourth quarter of 2016 were of your utmost quality, exhibiting much less risk than those funded last year, this according to the latest CoreLogic Housing Credit Index (HCI).
The HCI factors include:
Credit score (the better the better)
Loan-to-value ratio (LTV)
Debt-to-income ratio (DTI)
Documentation type (generally a single game in town nowadays: full doc)
Occupancy status (owner-occ is the better occ)
Condo/Co-up share (SFRs are safer)
While the mortgages look pretty good, the company did observe that the reduction in risk from both each year and a quarter earlier could possibly be partially attributed to a higher refinance share.
Per CoreLogic chief economist Frank Nothaft, refinance borrowers usually have lower loan-to-value ratios (LTVs) and debt-to-income ratios (DTIs) than their house purchase counterparts.
And because home loan rates have since moved higher from late this past year, default risk could increase as lenders loosen underwriting guidelines to allow \”harder-to-qualify borrowers.\” Nothaft added that fraud also can rise as the mortgage market gets more purchase-heavy.
Credit Scores Up, DTIs and LTVs Steady
As you will observe from the chart above, mortgage credit risk has gone down sharply over the past a few years. It was highest in 2006 when home values peaked and options arms were all the rage (they aren’t slated to resurface soon or ever).
During the fourth quarter, the regular credit score for home buyers was 737, up 4 points from your fourth quarter of 2015.
Additionally, the proportion of buyers with credit scoring under 640 (not quite subprime but on the riskier side) was roughly one-tenth the speed seen in 2001.
In other words, mortgages still go to really creditworthy borrowers, that\’s generally a good thing, though not completely immune from risk.
Meanwhile, the standard DTI ratio for home buyers in Q4 2016 was 36%, unchanged from the year earlier. At the same time, the share of buyers with DTIs a lot more than or equal to 43% (the Qualified Mortgage cutoff) was up \”slightly\” in comparison with levels seen in 2001.
Finally, LTVs were up by less than one percent year-over-year in the fourth quarter, rising from 86.7% to 87.1%. Truly the only potentially troubling data point was that buyers through an LTV of 95% or higher increased by a lot more than one-fourth compared with 2001.
Is Down Payment Still the best Problem?
That tells me down payment has long been the biggest hurdle to homeownership, and perchance the biggest risk facing the housing sector as home prices ascend to new heights.
While many borrowers have excellent credit ratings . and no problem making monthly housing payments, the great majority are unable to put down a sizable put in.
Aside from making it more difficult to be eligible for a a mortgage thanks to private mortgage insurance along with a higher mortgage rate, it also means these borrowers have a greater risk of falling underwater if things please take a turn for the worse (again).
And if there\’s an expectation this time around that home buyers will be bailed out in a real situation, we could have another major issue on our hands through the next crisis.
But because the mortgages being underwritten today are of the utmost quality, we may actually avoid much the same fate.
You have to remember that in addition to being upside down on the mortgage, more and more same borrowers couldn\’t actually make their payments.
Today\’s borrowers can. That is a very important detail.