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The pristine performance of mortgage loans in the U.S. with a vintage of 2009 or later is an indicator that underwriting standards could be loosened, according to CoreLogic senior economist Molly Boesel.
In an analysis entitled "What's an Acceptable Level of Mortgage Default?" published in CoreLogic's December 2014 edition of The MarketPulse, Boesel constructs an argument that there is room to relax lending standards based on her assessment that improved housing market conditions and economic conditions, and not just a tighter credit box, are responsible for improved loan performance since 2009.
"Do mortgage vintages really need to be as pristine as they have been in the most recent years?" Boesel said in her analysis. "While there are many factors besides loan performance that should be considered in the policy decisions around access to credit, it is clear that mortgage originations made in the mid-2000s are still driving the SDQ (serious delinquency) rate, and originations made since 2009 are performing much better."
The percentage of mortgages in the U.S. that were seriously delinquent (more than 90 days past due or either in foreclosure or bank-owned) was 4.2 percent in CoreLogic's latest data (October 2014), less than half of the peak percentage of 8.6 in February 2010. Out of all the mortgage loans that were active as of the end of September 2014, only 25 percent of them were originated during the years immediately prior to the housing bust (2004 through 2008) while 77 percent of all seriously mortgage delinquent loans as of September 2014 were originated during those years.
When excluding the mortgages originated during 2004 to 2008, the nation's serious delinquency rate drops by half from 4.2 percent down to 2.1 percent, according to CoreLogic.
Boesel presented two graphs, one that demonstrated serious delinquency rate for all mortgages since 2004 and one that shows serious delinquency rate of "plain vanilla" mortgages (owner-occupied, fully-documented, 30-year-fixed rate, conventional conforming purchase mortgage with mid-to-high credit scores and moderate loan-to-value ratios). The serious delinquency rate was only slightly lower for the "plain vanilla" mortgages, and the loans with a 2005 through 2008 vintage still showed outsized serious delinquency rates, leading her to the conclusion that the impact of tighter lending standards on the declining serious delinquency rate has been minimal.
"Given that forecasts for the economy and unemployment rate indicate slow and steady improvement and for house prices to continue to increase at a moderate pace, the excellent performance of current mortgage vintages gives some support to the notion that underwriting could be loosened in a responsible manner that still supports sustainable homeownership," Boesel said in her report.
