“Put simply, it’s time to lend again to borrowers with less-than-perfect credit.”
Squeaky-Clean Loans Lead to Near-Zero Borrower Defaults-And That is NOT a Good Thing
There’s something interesting and important going on in the mortgage market today: borrowers who took out mortgages in the past five years have rarely defaulted, making them better at paying their mortgages than any other group of mortgage borrowers in history.
This is happening for two main reasons: 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 end up going 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.
There have been almost no defaults on mortgages originated in the past five years
The default rate on new mortgages is tracking well below mortgages originated from 1999 to 2003, a period with reasonable lending standards and fairly low default rates. This chart illustrates by origination year the rate at which mortgages guaranteed by Fannie Mae have gone six months delinquent (or liquidated before that point). We refer to this as the default rate. The really poor performance of the 2006–08 vintages jumps off the page.