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CoreLogic: Easing Standards for DTI, LTV Underwriting

A deep dig into recent home purchase loans shows that some of the underwriting standards employed by FHA and the GSEs (Fannie Mae and Freddie Mac) eased over the year that ended with Q2 2018. Archana Pradhan, an analyst with CoreLogic's Mortgage Finance and Risk Management Department writes in the company's Insights blog that neither conventional nor FHA lending extended the easing to their respective treatment of credit scores.

CoreLogic looked at the three key factors in mortgage underwriting, debt-to-income (DTI) and loan-to-value (LTV) ratios along with credit scores. The analysis included average scores and ratios, but Pradhan says that measure does not necessary indicate any higher risk to the housing market, so the company included an analysis of the trends in the share of loans originated using the relaxed standards.

Loans with DTI ratios above 45 percent peaked pre-crisis at around a 35 percent share for both GSE and FHA lending. The GSE share peaked and was headed down before the housing crash started, crossing FHA as its shares were still rising. Throughout the housing crisis FHA shares of loans with DTIs over 45 percent never fell below one-fifth of the total while the GSE share was in the 5 to 7 percent range.

In July 2017 Fannie Mae raised its maximum DTI from 45 percent to 50 percent. The average DTI ratio had been rising steadily since mid-2013, but took off after that change, rising 2 percentage points from the second quarter of 2017 to almost 37 percent by the same quarter this year. The average DTI for FHA loans started to rise after Q2 2015 and by the second quarter of this year had risen to 43 percent …

...Both GSEs started buying loans with less than 5 percent downpayment in early 2015 and their share of these high LTV loans started rising almost immediately from less than 2 percent in 2014 to 9 percent in the second quarter of 2018.

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