The Urban Institute's Laurie Goodman has noticed something 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.

While this sounds like a positive development, given that the Great Recession was caused in part by borrowers receiving loans they couldn't afford, it may be a signal that credit is too tight. This near-perfect performance is evidence that it’s time to ease lending standards, she argues.

The performance of mortgages originated over the past few years has been extraordinarily good by historical standards. Not only is the credit box exceptionally tight, but even controlling for credit characteristics, mortgages are also performing much better. This suggests that there is plenty of room to safely expand the credit box. Our analysis suggests that given this environment of meticulous underwriting, borrowers with lower credit scores may well perform better than their counterparts performed in the past.

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