According to the Federal Reserve Bank of New York’s Household Debt and Credit Report, mortgage originations grew in the 4^th quarter of 2016. Largely resulting from 4^th quarter growth, origination volume in 2016 exceeded its level in 2015. This marks the second consecutive year of growth in originations.

As the chart above illustrates, there was approximately $617 billion in originations over the 4^th quarter of 2016, 29.3 percent above origination volume in the 3^rd quarter, $477 billion, and 41.2 percent more than the volume of originations in the 4^th quarter of 2015, $437 billion. The growth over the past 4 quarters more than offset the 4-quarter declines in the both the 2^nd and 3^rd quarters of 2016. As a result, total origination volume in 2016 reached $1.9 trillion, 8.5 percent above its level in 2015, and its second consecutive annual increase.

However, recent growth in mortgage originations has largely not been mirrored by significantly lower credit scores. According to the Household Debt and Credit Report, median credit scores ended the year at 763, 16 points below its 2010 peak level, but 56 points above its 2006 level, 707. Similarly credit scores at the 25^th percentile are 22 points below their peak level, but 66 points above their 2006 level of 639. Meanwhile scores at the 10^th percentile are 3 points below their 2010 level but 77 points above their 2006 level. Overall, in the years since the recession ended credit scores remain near their peak level.

There are other characteristics to a mortgage besides the borrower’s credit score. Lenders will also assess the borrower’s debt capacity, debt-to-income, and the leverage that the borrower would like to take on when obtaining a mortgage, loan-to-value ratio. Using single-family loan level data provided by Freddie Mac and employing a technique similar to the one used by CoreLogic to measure credit tightness, illustrates that while credit sores and debt-to-income ratios remain at tight levels, leverage has largely recovered.

The first step is to calculate the credit score at the 10^th percentile for the 4^th quarter of each year ranging between 1999 and 2015. Then calculate the 90^th percentile DTI and the 90^th percentile LTV ratio. The 10^th percentile credit score, 90^th percentile DTI and 90^th percentile LTV ratio for each year are compared to the average of that series, the levels between 1999 and 2003, a period considered normal.  The results are shown above for fixed rate purchase mortgage originations purchased by Freddie Mac*.

As illustrated by the figure, the housing boom was characterized by higher DTI on the margin**. The onset of the recession correlated with a decline in the 90^th percentile DTI and the 90^th percentile LTV. At the same time, the 10^th percentile credit score rose. In the ensuing years, the 90^th percentile DTI remains low and the 10^th percentile credit score remains high. However, leverage has recovered.

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* This link will take you to the 3 charts below show the trends in the actual levels of each loan characteristic.

** Another metric that expanded during the housing boom and then collapsed was the share of adjustable-rate mortgages.

Tags: economics, finance, home building, housing, housing finance, mortgage finance, single-family finance