Credit ratings plummeted in May, but what does that mean?
The average borrower’s credit score fell in May, driven by a significant drop in cash-out refinance ratings — a move attributed to higher-credit borrowers who left the cash-out refinance pool in the past two years. .
According Black KnightThe origins report released on Monday. Meanwhile, average credit scores for buy locks edged down two points to 732 and the term refinance rate fell one point to 731 in May from a month earlier.
“It’s historically typical behavior for high credit score borrowers to exit the refi market when rates rise; we’ve seen it time and time again,” Andy Walden, vice president of business research at Black Knight told HousingWire. “When higher-rated borrowers leave the total pool, it results in lower overall credit ratings among refinance transactions.”
Riskier lending habits and borrowing options led to the housing crash 15 years ago, but Black Knight said credit ratings for buy locks have remained strong and the current average credit rating of 751 for existing mortgage holders is the highest since 2000.
Declining credit scores may indicate borrowers are turning to home equity line of credit (HELOC) and second lien home equity loans, which have stricter lending standards, Walden said, adding, “ High credit borrowers who qualify can switch to these products while those with lower credit scores may not qualify and can use cash refinances to access equity.
Brooklyn brokerage owner Kevin Leibowitz said he hasn’t seen enough lenders expand the credit box to get more borrowers, but he expects loans to be underwritten loosely. compared to two years ago.
“Lenders are finally getting to difficult loans and difficult loan profile (non-standard income) borrowers who weren’t getting much love during the refi boom,” Leibowitz, president of Grayton Mortgage, said. “Your average refinance would probably seem riskier because if they didn’t refinance two years ago, why are they refinancing now?”
With refi volume lower this year by more than 70% compared to 2021, “lenders are opening the credit box to riskier borrowers,” Selma Happ, deputy chief economist at CoreLogictold HousingWire.
It’s worth watching trends with credit scores, but the capital gains homeowners have seen over the past two years provide a good buffer for riskier loans, Happ added. An average borrower saw a gain of $63,000 in the first quarter of this year, a 32% year-over-year increase, according to CoreLogic’s report.
A borrower’s credit score doesn’t reflect everything about the health of the mortgage market, Leibowitz said, adding, “What would be concerning is when the loan-to-value (LTV) ratio goes up.”
A high LTV means more risk because if a borrower defaults on a loan, the lender is less likely to get enough money by processing and selling the asset to cover the remaining loan amount and associated costs. process.