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With all the sophisticated equipment and computer models forecasting, the weather is still not an exact science. It all depends on which way the wind blows.
It seems that predicting mortgage default rates is about the same. According to recent reports on default risk:
- The Universal Financial Associates (UFA) Default Risk Index says it’s up 25% over 2016
- Corelogic says it’s up, just slightly, but remains in “normal” baselines (as if anything anymore is normal)
- Equifax reports the default indices fell by 4 basis points, to a 5 month low.
It all depends on which way the rates go.
According to Frank Nothaft, of Corelogic, since 2009, every half point mortgage rate increase resulted in a drop of about 9 points in a new borrower’s credit score. That results in riskier loans, increasing the potential for defaults.
Rising mortgage rates, rising home prices, and the loosening of credit standards means lenders will be pressed to qualify more marginal borrowers with lower credit scores. They will also likely have less money for down payments and reserves and potentially higher debt-to-income ratios. All of these factors lead to higher risk loans.
This is the mortgage market of the future. Lenders need to learn to play and compete in such a market.
There will always be a risk when lending. The challenge is to match that risk with reward. A reward that can only come when the loans perform as expected.
Not all will. Success lies in identifying those that are worth the risk and in having the fortitude to walk away from those that aren’t. Can you?
Lend carefully, my friends.
