Fannie Mae mortgages and credit scores
Eugen G Tarnow September 16 2015 10:25:47 AM
By Eugen Tarnow, Ph.D.Avalon Business Systems, Inc.
http://AvalonAnalytics.com
Ever wondered how your credit score affects the interest rate? Well, in 2013 the interest rate decreased on average 0.2% for every 100 point increase in credit score.
Nevertheless, the credit score only amounted to 7% of the variance.
Fig. 1. Interest as a function of borrower's credit score.
Mortgages typically go to partners with very small differences in credit score (see Fig. 2), the standard deviation is only 30 points, and there are almost no mortgages to partners with a credit score difference of 100 or more.
Fig. 2. Distribution of differences in credit scores for borrower and co-borrower
This suggests four explanations: that we marry those with the same credit score, that lenders do not lend if the scores are too different, that the credit score process artificially forces the scores to be similar, or that the mortgage process tends to force credit scores to become similar over time. The difference in credit scores is somewhat larger for first time home buyers (standard deviation is 40 points instead of 30 points for all mortgages, the overall credit score is 15 points lower per borrower), but that could does not exclude any of the four explanations (we may divorce those with different credit scores, the lenders are encouraged to give loans to first time home buyers, etc.), see Fig. 3.
Fig. 3. Distribution of differences in credit scores for borrower and co-borrower, first-time home buyers only.
And there are very few mortgages in which at least one credit score is 600 or below.
Fig. 4. Frequency of mortgages as a function of credit score.
And one might ask - how did the distribution of credit scores change from 2000 to 2007 to 2013? In Fig. 5 we see that the distribution became bimodal in 2007!
Fig. 5. Number of mortgages as a function of credit score during the years 2000 (top), 2007 (middle) and 2013 (bottom). Notice the appearance of two peaks during the mortgage bubble in 2007, almost as if 700 was the new 800.
In 2007 the total credit score became the same for first time home buyers as for everyone else. The standard deviation of the difference in credit scored increased from 40 to 50 for first time home buyers and from 30 to 40 for everyone else. If we divide the borrowers into the two peaks of Fig. 5 (middle panel), the standard deviation of the difference in mortgage score for the top group (borrower credit score above 725) is 35 and for the bottom peak it is 50. Thus relaxing the borrowing conditions allows the difference in credit scores to increase.
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