Mortgage default risk climbs to three-year high

Enjoy complimentary access to top ideas and insights — selected by our editors.

The risk of mortgage defaults reached its highest point since the second quarter of 2015 as lenders loosen credit, according to VantageScore.

With mortgage rates trending upward this year, the default risk index (a comparison of the total volume and weighted-average risk profile of quarterly originations) increased to 100.9 in the first quarter of 2018, a 5.63% growth year-over-year and 4.42% growth from the previous quarter.

Lenders are showing more propensity to take on risk. The gradual loosening of credit is causing an escalation in mortgage originations as they increased 2.03% year-over-year in 2018's opening frame, but had a drastic decline of 18.15% from the final quarter of 2017.

This shorter-term decline in originations also points to the year-long incline of interest rates, as well as the perpetual housing shortage.

"Despite recent data indicating a strong U.S. economy and job market, including signs of wage growth, overall mortgage applications fell for the third straight week," Joel Kan, the MBA's associate vice president of economic and industry forecasting, said in a press release. "Housing continues to be hampered by the lack of homes for sale and crimped affordability."

The shortage in available homes for sale helps explain lenders loosening access to credit. Increasing borrowers and being more open to risk stimulates the market.

The weighted probability of a mortgage loan default stands at 1.17%, rises of 6 basis points year-over-year and 5 basis points quarter-over-quarter.

VantageScore's default risk index is a measure of relative changes in risk level, benchmarked at 100 during the third quarter of 2013, the first time the data were compiled.