The Majority of Mortgages Go to Households with the Strongest Credit

Aggregate household debt balances were unchanged at $11.85 trillion in the second quarter of 2015 according to the Federal Reserve Bank of New York. Housing-related debt, mortgages and home equity lines of credit fell by a combined $66 billion, $55 billion and $11 billion respectively, while non-housing debt, auto loans, credit cards, student loans and other loans, rose by $68 billion, $38 billion, $19 billion, $1 billion, and $10 billion respectively. Other consumer debt includes consumer finance (sales financing, personal loans) and retail (clothing, grocery, department stores, home furnishings, gas, etc) loans. Overall household debt remains 6.5% below its third quarter of 2008 peak level of $12.68 trillion.

In this most recent iteration of the Household Debt and Credit Report, the Federal Reserve Bank of New York presented information on the dollar value of of mortgage originations by households grouped according to their credit score. The new information indicates that households with the strongest credit score receive the majority of mortgages while households with good credit, a category that historically received the majority of mortgages, has seen their share shrink.

As shown in Figure 1, 19% of the dollar value of mortgage originations went to households with a credit score equal to or exceeding 780 in 2000. The share of the dollar value of mortgage originations for households with the best credit rose to 30% in 2003, but shrank to 23% in 2004 holding steady near that level until 2007. Subsequently, the share of the dollar value of mortgage originations granted to households with the most pristine credit expanded significantly beginning in 2008 and by 2010 accounted for half of all household mortgage originations. Households with strong credit scores continued to account for 50% or more of the dollar value of all mortgage originations to households until 2014. In 2014 the dollar value of mortgage originations across all credit scores fell, but the dollar value of mortgage originations to households with the best credit fell the most.

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Although households with the strongest credit accounted for nearly 1 out of every 5 dollars of mortgage originations in 2000, those with credit scores in the 2nd and 3rd highest categories, 660-719 and 720-779, accounted for about 1 out of every 2. Combined, households in these two categories continued to account for more than half of all mortgage originations until 2008. In 2008, households with “good” credit accounted for 47% of the dollar value of mortgage originations. By 2012, the share of the dollar value of mortgage originations received by these households reached a low of 39%. In 2013, households with mid-tier credit obtained 40% of the dollar value of mortgage originations. The share rose to 45% in 2014 because the decline in the dollar value of of mortgage originations for those with good credit over the year, 32%, was less than the contraction in the dollar value of mortgage originations received by households with the strongest credit, 49%.

According to the most recent Mortgage Lender Sentiment Survey, demand for purchase mortgages from consumers with mid-tier credit scores is relatively weak. Mid-tier credit score ranges from 680 to 740, encompassing consumers that would be in the 2nd and 3rd category shown in Figure 1. Noting weak demand among consumers with mid-tier credit, Fannie Mae’s latest Mortgage Lender Sentiment Survey asks mortgage originators that conduct business with it to identify up to two factors behind the weakness. The two reasons behind the weak demand from mid-tier consumers that received the most support were “economic conditions such as wage growth or employment are not favorable for consumers/borrowers with mid-tier credit” and “there is a lack of supply or inventory of affordable housing stock”.

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Although demand for purchase mortgages for consumers with mid-tier credit is believed to be relatively weak, the majority of mortgage originators do not have plans to do more business with consumers in this credit score range, 680-740. Instead, most mortgage originators do not plan any changes in the amount of business done with consumers holding mid-tier credit scores.  As shown in Figure 3 below, 37% of mortgage originators, when asked to indicate whether their firm plans to do more or do less business with consumers holding a mid-tier credit score, plan to do more business. While no firm plans to do less business, the rest of firms, 63%, plan no major changes to their business with consumers holding mid-tier credit.

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