Trends in Credit/Credit Scores in Residential Lending

What is a huge concern of Fannie Mae and Freddie Mac? It isn't rates, or credit risk. It is having their business flow, and that of their client's, interrupted due to some type of cyberattack. And I have received plenty of e-mails talking about "ransomware" which is where a type of malicious software designed to block access to a computer system until a sum of money is paid. Usually companies just pay it and go on with their business, but it should be reported to authorities, and there is a site to do exactly that run by FS-ISAC.

Credit is definitely part of lending. What is going on with trends out there and what are lenders & vendors seeing?

Last week TransUnion is releasing its quarterly debt and delinquency data. "Overall, consumer credit markets have maintained a strong performance in Q3. Mortgage delinquency rates continued the trend of double-digit annual declines, and both auto loans and credit cards showed strength through stable default rates and balance growth. The mortgage delinquency rate declined to 2.40% in Q3 2015, from 3.36% in Q3 2014. Millennials and the 60+ age group are the least risky consumer groups, with delinquency rates at 1.62% and 1.77%, respectively. Super prime and prime consumers continue to have strong appetite for mortgage loans, with a 50% and 40% year-over-year increase in originations, respectively (viewed one quarter in arrears). And every U.S. state experienced yearly declines in mortgage delinquency rates."

TransUnion also reported in on the credit card market, saying that total bankcard balances grew 4.7% to $637 billion in Q3 2015, compared to $608 million in Q3 2014. There were 15.1 million new credit card originations in Q2 2015, up from 13.5 million in Q1 2015. And that the credit card delinquency rate rose to 1.43%, from 1.19% the previous quarter." For more information visit Q3 2015 Industry Insights Report.

And Equifax reported that, "Banks' Mortgage Portfolios Not Matching Hot Pace of Originations." "Equifax today provided new data and insights on a major frustration facing some of the nation's leading mortgage bankers: Why their mortgage loan portfolios have stagnated at the same time originations are soaring."

Nekeidra Taylor from the Wilbert Group shared data from Equifax's National Consumer Credit Trends Report indicating that subprime mortgage originations have risen across the U.S. The amount of first mortgages to borrowers with low credit scores increased 30.5 percent, home equity installment was up 29.5 percent and HELOCS rose 20.4 percent. Subprime loans still only account for a small amount of overall total mortgage originations, mainly due to the low credit score requirement, which is generally below 620. In the first five months of the year, 525,000 HELOCS were originated and only 7,800 were considered subprime and those who obtained a HELOC with low credit saw a 21.5 percent decrease in borrowing power from May 2014 to May 2015. This indicates that those getting HELOCs generally have a credit score above 620, suggesting that more lenders are taking the necessary precautions to limit their risk.

Recently, for all loan types, U.S. Bank Home Mortgage removed the requirement to close the account when paying off revolving debt to qualify. Revolving debt paid off prior to application that continues to be listed on the borrower's credit report must be properly documented as paid in full by the creditor statement dated after the credit report or a credit report supplement.

Revolving account(s) paid during the transaction will require a copy of the cancelled check, the paid statement from the creditor or a credit supplement showing the balance has been paid to $0. Evidence the account has been closed will no longer be required. Revolving account(s) paid off at closing must be reflected on the HUD1/Closing Disclosure. All funds used to pay off debt must be sourced and verified.

Reaching back into the summer, Zelman & Associates published their July Mortgage Originator Survey emphasizing that entry-level credit availability was better than anticipated. The credit quality index declined to 64.6 in July from 65.1 the previous month, reaching its lowest level since mid-2012 and the underwriting criteria index dropped to 64.9 to 65.5 as 26 percent of lenders cited easing of standards. The average credit score for purchase loans dropped to 728 in July from 731 in June and 48 percent of lenders expect standards to become more lenient over the next year compared to 5 percent that expect a tightening of standards. For more information about the survey, contact Ivy Zelman .

And even earlier this year BofA Merrill Lynch released a report on mortgage lending trends highlighting that the MBA's mortgage credit availability Index has been increasing the past few months, reaching 125.5 in July, which is the highest level since June 2009. The index is still only a fraction of its pre-crisis level, although credit availability is improving, it's moving at a slow pace. Similarly, the most recent housing affordability reading (May) indicates affordability has dropped to the low end of the post-crisis range, mainly due to the rise in home prices. The share of refinances has also been on the decline, and most lenders have shifted focus towards the purchase market. The housing demand is expected to drop if interest rates inch higher but long term interest rates should remain at current levels.