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Credit Variables Explained – Home Ownership

By David Snitkof
October 14, 2013

If you own a home, that home may very well be your most valuable asset, and the mortgage on that home may be your largest debt.  If you rent your home, the rent you pay may just be your largest single monthly expense.  It therefore stands to reason that a borrower’s home ownership/renter status will loom large in any analysis of financial stability or likelihood to repay a loan.

 

Borrower Owner/Renter Status Trends

In the graph below, we can see the home owner/renter status of LendingClub borrowers as reported on their loan applications.  As you can see, the share of borrowers reporting mortgages/ownership has increased over time, and in 2013, over 61% of borrowers report being homeowners.

 

lc-orig-ownvsrent

 

Do Owners Differ From Renters?

The graph below shows the share of 2013 LendingClub originations by loan term (3 or 5 years).  As we can see, borrowers who already have a mortgage are more likely to opt for longer duration P2P loans.  This may be due to the possibility that people who already have the obligation of a monthly mortgage payment want to minimize the additional monthly payment from this new loan.

lc-orig-byterm-ownvsrent

 

The graph below shows 2013 originations by home ownership status for the 5 largest states of residence represented on LendingClub.  As you can see, there is a dramatic difference, with borrowers in New York and California being much more likely to rent, potentially due to the high real estate prices in major population centers in those 2 states.

lc-origbystate-ownvsrent

This next graph shows 2013 LendingClub originations by loan amount for the various home ownership categories.  Borrowers with existing mortgages tend to get larger P2P loans, though it is not clear if this is due to them requesting larger amounts or to an increased ability to qualify for larger loans.

lc-origbyamt-ownvsrent

Home Ownership & Credit Risk

For decades, home ownership was considered in the lending industry to be an indicator of financial responsibility and low credit risk.  The logic was that if a person had been approved for a mortgage by a bank, he/she must have endured a lengthy and comprehensive underwriting process that ensured the borrower’s financial stability.  At first glance, it sounds completely reasonable, and in fact, it was likely true for a very long time.

 

However, the aforementioned logic relies on a very important assumption – that in order to get a mortgage and buy a home, one would have to pass rigorous underwriting standards.  As we have now learned, many institutions relaxed their credit standards in the late 90s and early 2000s, fueling a massive housing bubble and ultimately helping to cause the so-called “great recession”.  Maybe, owning a home is not the indicator of stellar credit that it once was.

 

In the graph below, we see relative default rates from LendingClub loans.  The numbers are indexed rather than presented in absolute terms to avoid confusion between loans that were originated at different times and have therefore had more or less time to go bad than others.  As we can see, for loans originated in 2007 and 2008 (the height of the recession), having a mortgage was associated with a higher risk of default!  In more recent years, home owners have actually performed better on LendingClub, perhaps due to banks’ post-bubble tightening of credit.  As anyone who has attempted to get a mortgage recently can attest, the underwriting process has become much more rigorous.

 

lc-corate-ownvsrent

The Bottom Line

To say that where you live and how you pay for it are important pieces of information is certainly an understatement.  Clearly, one’s home ownership status is critically important, as is the presence or absence of a mortgage, and it is important for any lender to understand these dynamics.  However, as we’ve seen in the graphs above, the relationship between this factor and credit risk is not always straightforward and is subject to interaction with other variables.  Used carefully and thoughtfully, the home ownership status as reported in a P2P loan application may be a useful part of your note selection strategy.

 

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