Borrowers who took out mortgages in the past five years have rarely defaulted, making them better at paying their mortgages than any other group of mortgage borrowers in history, according to a recent brief from Urban Institute.
The brief describes that this is happening for two main reasons being only the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them end up going into default. Urban Institute believes that a near-zero-default environment is evidence that there is a need to open up the credit box and lend to borrowers with less-than-perfect credit.
The default rate on new mortgages is tracking well below mortgages originated from 1999 to 2003, a period Urban Institute sites as having reasonable lending standards and fairly low default rates.
Looking at the better-performing vintages, the brief states that it is clear with three years of seasoning, the 2009–10 vintages are defaulting only marginally less than the 1999–2003 vintages. Additionally, the 2011–Q2 2015 vintages with three years of seasoning are hardly defaulting at all.
The brief states that part of this better performance can be explained by the shift in originations toward less risky borrowers. Urban Institute states that from 1999 to 2004, roughly one-third of Fannie Mae–guaranteed borrowers had FICO scores below 700, another third had FICO scores from 700 to 750, and the final third were above 750. Likewise, from 2011 through Q1 2015, less than 10 percent of borrowers had FICO scores below 700, 22 percent were from 700 to 750, and 69 percent were above 750. The numbers are very similar for Freddie Mac.
But the distribution of credit scores is not the only factor, according to the brief. If comparing mortgages with the same credit profiles, each group has performed better than it has in the past.
The credit box is tight, according to Urban Institute, and it appears that every loan being made now is cleaner than a loan with the same characteristics made between 1999 and 2003. Urban Institute attributes this to the amount of underwriting time and attention to detail, making mortgage origination a very time-intensive business.
The brief says that the performance of mortgages originated over the past few years has been extraordinarily good by historical standards, and not only is the credit box exceptionally tight, but even controlling for credit characteristics, mortgages are also performing much better. Urban Institute suggests that this shows that there is plenty of room to safely expand the credit box. They believe that their analysis suggests that given this environment of meticulous underwriting, borrowers with lower credit scores may well perform better than their counterparts performed in the past.