Mortgage Lending Gets Riskier for the Fifth Straight Month

The riskiness of mortgage loan originations rose in January, the fifth straight monthly increase, according to the monthly report from American Enterprise Institute's International Center on Housing Risk.

The composite National Mortgage Risk Index for Fannie Mae and Freddie Mac purchase loans hit a series high of 11.94% in January, up 0.4 percentage point from the average for the prior three months and 0.8 percentage point from a year earlier.

Within the composite, the risk indices for Fannie Mae, Federal Housing Administration, and VA also hit series highs in January.

Donald Layton, the chief executive of Freddie Mac, doesn’t think the new 3% down payment mortgage option the government-sponsored enterprise is launching next month will contribute to that risk going forward.

Speaking in an interview with HousingWire after Thursday’s earnings call with investors, Layton said the 97% loan-to-value option will be limited to borrowers who can prove a “very good income.”

Furthermore, he reinforced that underwriting standards are stronger than ever and that their regulator, the Federal Housing Finance Agency, will maintain the overall direction of the products, also becoming available at Fannie Mae.

AEI says marked shift in market share from large banks to non-banks accounts for much of the upward trend, as non-bank lending is substantially riskier than the large bank business it replaces.

"With the NMRI once again hitting a series high, the risks posed by the government’s 85% percent share of the home purchase market continue to rise," said Stephen Oliner, codirector of AEI's International Center on Housing Risk.

The January results are based on more than 180,000 home purchase loans, nearly the universe of such loans with a government guarantee. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since December 2012 moved above 5.49 million.

“Policy makers need to be mindful of the upward risk trends that are occurring with respect to both first-time and repeat buyers,” said Edward Pinto, codirector of AEI's International Center on Housing Risk. “Recent policy moves by the FHA and (Federal Housing Finance Agency) will likely exacerbate this trend.”

Other findings include:

• The QM regulation has not reduced the volume of high DTI loans: over the past 3 months, 24% of loans had a total DTI above 43%, up two percentage points from the share in 2013:H2.

• FHA is not compensating for the riskiness of its high DTI loans; Fannie and Freddie are compensating only to a limited extent.

• FHA’s NMRI stood at 24.41% in January, up 0.2 percentage point from the average for the prior three months, and 1.5 percentage points from a year earlier. The current level implies that nearly one-quarter of FHA's recently guaranteed home purchase loans would be projected to default under severely stressed conditions akin to the 2007-08 financial crisis.

• The softness in mortgage lending is not due to tight standards but to reduced affordability, loan put back risk, and slow income growth for many households.