All lenders can recite the 5 C’s of credit backward and forward as easily as reciting the ABCs.  However, not as easy is determining the risk of loss and deciding whether to accept or not to accept the risk.  Lenders must objectively weigh the importance and evaluate the risk of loss using ratios and thresholds.  We get to see the outcomes of their decisions using HMDA data.

What the HMDA Data Revealed based on the 5 C’s of Credit

With the 2019 Modified LAR and LendingPatterns™, I was able to learn some interesting statistics.  I filtered for:

  • 1st lien, conventional, owner-occupied as principal residence, 1-4 family site-built; home purchase
  • Excludes lines of credit, reverse mortgage, and commercial lending

The first C is character—reflected by the applicant’s credit history. Credit history is cited as a reason for denial in 27.2% of 248,000 denials, in some cases in conjunction with other reasons for denial.

The second C is capacity, as expressed by the applicant’s debt-to-income (DTI) ratio. Among 2.78 million decisioned applications with a reported DTI, 3.8% of the DTI ratios (103,000) are above 50%.  This percentage is 6.7 times higher for “guvvie” loans at 25.1% (363,000 out of 1.45 million).

The third C is capital—the amount of money an applicant has. We can observe the down payment on a home purchase loan by looking at the reported combined loan-to-value (CLTV) ratio. Among 2.71 million decisioned applications with a reported CLTV, 33.0% of the CLTV ratios are above 95% (894,000), meaning the borrower put less than 5% down.  Further drilling down into these high CLTV loans revealed that 4.3% of them exceeded 50% DTI ratios (38,000 out of 889,000).

The fourth C is collateral, an asset that can back, or act as security for, the loan. Here we can look at the appraised value of properties securing home purchase loans. Among 2.62 million decisioned applications with a reported property value and county, 61.4% of the property values are above the county median home value, while the remainder are below.

The fifth C is conditions: the purpose of the loan, the amount involved, and prevailing interest rates. Among 2.53M approved loans:

  • The average loan amount is $315,000.
  • 2% (2.26 million) are conforming loan amounts*
  • 4% (2.31 million) are 30-year term loans.
  • 5% (2.34 million) are fixed-rate loans.
  • 0% (122,000) have a rate spread above the high-priced loan threshold. (Here the denominator is 2.45 million approved loans with a rate spread reported.)

*The denominator varies slightly within these bullet points to account for “not applicable” data.

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