Higher Credit Scores Helping Purchasers
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.”
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.50 MBS) lost -74 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
Jobs, Jobs, Jobs: Last week was all about the labor picture and the market’s view on its impact on any future Fed action. Overall, the data was very negative for MBS as it was very strong (there is an inverse relationship between strong economic data and rates). As we have been saying for some time, the focus of long bond traders is less on the Non-Farm Payroll (NFP) number and more about the Average Hourly Wages.
Average Hourly Wages were double the market expectations (0.4% vs est of 0.2%). But its the longer term trend that the Fed looks at and on a year-over-year basis, Average Hourly Wages jumped up to 2.5%. Wage Inflation is a very important metric and while commodity prices will be low for a very long time (oil, etc) we are seeing a nice increase in wages. This has provided the most weight on pricing and caused mortgage rates to rise to their highest levels since mid September.
What Happened to Rates Last Week?
NFP: Much stronger than expected in October with a reading of 271K vs est of 180K. September is revised 5,000 lower to 137,000 with August revised 17,000 higher to 153,000 for a net 12,000 gain.
Unemployment Rate: It fell to 5.0% vs expectations for it to remain at 5.1%. And this decrease was not due to a drop in the Participation Rate which actually increased from 65.9% to 66.00%.
|What to Watch Out For This Week: