Market Watch - Daniel Goldstein - Sept 8, 2016 2:54 a.m. ET
Low default rate could mean home lending credit standards are too tight, says Urban Institute
While the days of “NINJA loans” (no income, no job, no assets) are for the most part gone from the American mortgage marketplace, at least one housing think tank says the pendulum has now swung too far in the other direction and made it harder for many Americans to get a mortgage.
According to an analysis released in August from the Washington, D.C.-based Urban Institute, which “offers solutions through economic and social policy research,” the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2% of the loans defaulted after 10 years. By comparison, 12% to 13% of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data.
The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69% of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1% of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700.
Only “the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them end up going into default,” wrote Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center in an Aug. 31 blog post on the institute’s website. “A near-zero-default environment is clear evidence that we need to open up the credit box and lend to borrowers with less-than-perfect credit,” she wrote.
By comparison, the Mortgage Bankers Association’s credit availability index, which tracks the relative ease (or difficulty) of obtaining a mortgage by factoring in data such as credit scores, guidelines from institutional loan buyers and appetite for risk , shows that while credit availability has dramatically increased since 2011, it has plateaued since the middle of last year, and is well below the levels of 2004, the last “normal” year of lending and credit scores.
Still, during the crash, a larger percentage (and because of the boom, a larger volume) of the lowest-qualified buyers did default. According to Fannie Mae’s data, 25% and 30% of loans made to the least-qualified borrowers — people with FICO credit scores lower than 700 and loan-to-value ratios higher than 80% — between 2006 and 2007 defaulted. By comparison, only 5% of people with similar credentials defaulted between 1999 and 2003, the Urban Institute said.
But Urban Institute’s analysis takes issue with the conventional wisdom that the housing market crashed because so many more lower-qualified borrowers got mortgages than previous housing booms. While one-third of the borrowers in the 2006 to 2007 mortgage pools had FICO scores lower than 700, it was no different than the one-third with similarly low scores that made up the mortgage pool from 1999 to 2004, the Urban Institute said.
“What changed was that there was a toxic mess of bad loan products in the 2006 and 2007 pool such as exploding ARM’s and liar loans,” said Sheryl Pardo, associate director of communications with the Urban Institute. “The credit profile of the borrower did not change,” she said. By comparison, just 10% of mortgage borrowers between 2011 and 2015 had credit scores lower than 700, according to the Urban Institute.
The Urban Institute also noted that as a result of the Dodd-Frank financial reform law and other changes mandated by the Consumer Financial Protection Bureau, loan officers are spending more time on mortgage applications, from one hour per application in 2002 to five hours per application in 2015, with the number of monthly retail applications processed per mortgage underwriter falling from 179 in 2002 to 34 a year ago.
“Given this environment of meticulous underwriting, borrowers with lower credit scores may well perform better than their counterparts performed in the past,” Goodman wrote.