Monday, May 23, 2016

CoreLogic: Far Fewer Low Credit Score Applicants Than Before Housing Crisis

by Bill McBride on 5/23/2016 09:35:00 AM

An interesting post from Archana Pradhan at CoreLogic Far Fewer Low Credit Score Applicants Than Before Housing Crisis. An excerpt:

One of the key factors used in mortgage underwriting as well as in our Housing Credit Index is the credit score. The average borrower credit score for home-purchase originations has increased from roughly 700 in 2005 to almost 750 in 2015 (Figure 2). In 2005, the credit score for the first percentile ranged from 520 to 540 and showed a dramatic rise during the Great Recession, and is currently running in a range of 620 to 630. By just gazing at the borrowers’ credit scores, one could conclude that mortgage originations were constrained as a result of tight underwriting standards. But how has loan demand changed, particularly for the borrowers with relatively low credit scores? The origination volume is the end result of an interplay between loan applicants’ demand and lenders’ risk tolerances. Is there a way to disentangle mortgage credit supply conditions from mortgage demand?
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This graph from CoreLogic shows the significant increase in credit scores for the first percentile of borrowers.

At first glance, this would appear to be due to tighter underwriting standards, but Pradhan looks at denial rates and asks: If Credit Underwriting Has Tightened, Why Have Denial Rates Fallen?

The data shows that demand has fallen for low credit score borrowers; either they are more cautious, or - more likely - they are discouraged from even applying. Interesting data.