Mortgage Loan Numbers Drop Among Low Credit Score Applicants

In 2005, at the peak of mortgage loan applications, 11.7 million Americans applied for home-purchase mortgages. That number fell to a low of 3.6 million applications in 2011 before rising to 4.6 million in 2014, the last year for which data are available.

Part of the reason for the sharp decline is the distribution of credit scores among mortgage applicants. In 2005, the average credit score for home-purchase mortgages was 700; in 2015 the average score was 750.

CoreLogic released the data last Friday. CoreLogic economist Archana Pradhan observed:

The share of applications and originations with less than a pristine credit score has declined. The difference is more pronounced for applications than for originations. The share of credit scores below 700 for applications has declined and has been offset by a greater share of credit scores above 740. From a credit space perspective, the similarity of the two density distributions for 2015 suggests that lenders are largely meeting the demand of borrowers applying for a loan. Thus, the observed decline in originations could be a result of potential applicants being either too cautious or discouraged from applying, more so than tight underwriting as the culprit in lower mortgage activity.

[nativounit]

That indicates that mortgage lending may not be falling due to the tighter underwriting standards that are widely believed to be the cause of the drop in new mortgage loans. Consumers are essentially self-selecting whether or not to apply for a mortgage. In other words, demand is constrained, not supply. According to Pradhan, “[M]ore consumer education such as counseling and financial literacy programs could be as or more successful in raising origination levels than introducing new lending products with lower credit standards.”