Are Consumers ‘Self-Sidelining’ From Home Purchase Market?

If credit underwriting has tightened, then why have denial rates decreased?

It’s an interesting question with a fairly simple answer: Denial rates have decreased because fewer people with poor or borderline credit are applying for mortgages.

According to a post on CoreLogic’s Insights blog, the average borrower credit score for home-purchase originations increased from roughly 700 in 2005 to almost 750 in 2015. In 2005, the credit score for the first percentile ranged from 520 to 540 – however, that increased dramatically during the Great Recession and is currently in the range of 620 to 630.

But as CoreLogic’s research shows, tighter credit does not necessarily correlate to higher denial rates. Part of the reason is that consumers have become more aware of where their credit scores need to be before applying for a loan.

“[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,” writes CoreLogic’s Archana Pradhan in the post. “Consumers are cautious more than they have been in the past, and thus, self-sidelining of cautious/discouraged consumers makes it appear as if credit is tightening.”

So what can lenders do to prevent borrowers who might be creditworthy from “self-sidelining”?

Probably the only thing they can do is provide them with more education.

“More 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,” Pradhan writes.

Another factor keeping the denial rate low is that fact that far fewer borrowers are applying to purchase single-family homes, which tend to be less affordable.

To check out the full post, click here.


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