Could today’s historically low default rate be a bad thing?

by Ryan Smith02 Sep 2016
Borrowers who’ve taken out mortgages in the last five years have a better repayment rate than any other group of borrowers in history. In fact, barely any of the current crop of borrowers have defaulted – and that’s not a good thing, according to the Urban Institute’s Laurie Goodman.

In a recent blog, Goodman argued that the current low level of borrower defaults signals that mortgage credit is way too tight. According to Goodman, “only the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them go into default. A near-zero default environment is clear evidence that we need to open up the credit box and lend to borrowers with less-than-perfect credit.”

The default rate on new mortgages today is lower than that on mortgages originated from 1999-2003, “a period with reasonable lending standards and fairly low default rates,” Goodman wrote. “…Part of this better performance can be explained by the shift in originations toward more pristine borrowers, thanks to lender wariness of lending to anyone with even a hint of risk, as judged by borrowers’ FICO credit scores.”

According to Goodman, between 1999 and 2004, about a third of Fannie Mae-guaranteed borrowers had FICO scores below 700, while another third had scores between 700 and 750. From 2011 to 2015, on the other hand, less than 10% of borrowers had sub-700 FICO scores, and just 22% had scores between 700 and 750. That left a “staggering” 69% of borrowers with scores higher than 750, Goodman wrote.

And the current crop of borrowers’ “near-perfect performance” is evidence that it’s time to loosen lending standards, Goodman maintained.

“Not only is the credit box exceptionally tight, but even controlling for credit characteristics, mortgages are also performing much better,” she wrote. “This suggests that there is plenty of room to safely expand the credit box.”


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