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New mortgages for purchasing homes are churning out at a fast clip, with the borrowers getting those loans having some of the highest credit scores ever. Because credit is favoring a smaller segment of borrowers, the result is that loan performance is arguably the best in history.
Purchase mortgage originations in the second quarter of this year were up 15 percent from a year ago, according to Black Knight Financial Services. June, the height of the spring sales season, saw the largest purchase loan volume since 2007, due to a high volume of sales.
As cash-heavy investors move out, mortgage-dependent borrowers are moving in. Cash sales made up about 30 percent of total home sales in July, the latest reading, down from 34 percent in July 2014. It is at the lowest level in nine years.
High-credit borrowers, those with FICO scores above 700, are almost entirely behind the surge in purchase applications. Activity among borrowers with lower scores is flat to slightly lower from a year ago, according to Black Knight. In fact, just 20 percent of purchase originations over the past three months have come from borrowers with credit scores below 700, the lowest level in more than a decade. This as the average credit score for purchase mortgages hit a record high of about 755. The median credit score in the U.S. is about 720 according to FICO, and the average score is 695.
FICO is the most commonly used scoring model to determine credit risk. It was created by Fair Isaac Corp. "Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies," according to FICO. Scores range from a low of 300 to a high of 850. The higher the score, the lower the risk.
"Purchase volumes are seeing the most growth among the middle third of home price values ($150,000 - $349,000), higher than the national average, which speaks to middle-class strength," noted Ben Graboske, senior vice president of Black Knight's data and analytics division. "Sure, regulatory changes have tightened the credit box, but as the result has been the best-performing mortgages we've ever seen, that's inarguably a good thing."
While there are programs for borrowers with lower credit scores, like the government-insured FHA loan program, those borrowers are required to pay mortgage insurance; they also may not get the lowest interest rate available on their loans.
Fannie Mae recently announced it will require lenders to use so-called trended credit data when underwriting borrowers. Provided by Equifax and TransUnion, this data provide a more thorough analysis of the borrower's credit history, according to a Fannie Mae release:
"Currently, credit reports used in mortgage lending only indicate the outstanding balance and if a borrower has been on time or delinquent on existing credit accounts such as credit cards, mortgages or student loans. With trended credit data, lenders will have access to the monthly payment amounts that a consumer has made on these accounts over time."
"Our aim is to help lenders serve their customers efficiently so that more qualified borrowers have access to mortgage credit. Our goal is to make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers," said Timothy J. Mayopoulos, CEO of Fannie Mae, in the release.
Despite historically low mortgage interest rates, borrowers, builders and housing industry professionals continue to complain that credit availability is holding back the recovery. Loose credit was both the hallmark of the last housing boom and the reason for its demise. Lenders and federal regulators will not return to those days, but given where the numbers are now, it is clear there is some wiggle room in the credit box for more additional borrowers. That would lead to additional homebuyers.