In a briefing on FHA loans, the AEI Housing Center said the agency needs to work to reduce its share of high-risk loans and do more to help build the supply of affordable housing.
Edward Pinto of AEI said while the GSEs have worked to de-risk in recent years, the FHA is “picking up the slack,” which is leading to an unsustainable home-price appreciation gap.
The report found that the mortgage risk index (MRI) for FHA loans in the low-price tier was 28.9% in September 2018. That fell marginally to 27.3% in September 2019. The agency said high-risk loans have an MRI of more than 12%.
Additionally, the FHA has 47% of high-risk loans in the entry-level tier—a place where the agency does 80% of its business.
Pinto said that while the GSEs are moving in the right direction as the housing boom enters its 9th year, they’re actions alone are not enough to impact home-price appreciation. The small change is also impacted by the FHA taking on more high-risk loans.
Pinto added that the FHA must not only work to de-risk but reduce the number on entry-level loans and work to promote affordable housing options.
Home-price appreciation remained in line for most of the 1990s but began to veer off course during the early 2000s. The gap between home-price growth results in the Great Recession that began in 2007 and ended in 2011 once home prices corrected, falling below wage growth.
However, a similar trend of separation began in 2015 and home-price appreciation is one again distancing itself from wage growth.
CoreLogic’s latest Home Price Index found home prices rose 3.7% annually in November 2019 and are expected to increase by 5.3% by November 2020.
However, the Bureau of Labor Statistics' most recent report, released on January 10, revealed average earnings rose just 2.9% over the past year and increased 3 cents month-to-month to $28.32.
Among the reasons for the continual rise in price is the tightened supply, as the industry sits at the supply of around 2-2.5 months.
Tobias Peters noted several policies—from both the FHA and GSEs—that he called “pro-cyclical,” causing a further imbalance of supply and demand.
“All these policies have in common is they stimulate demand against supply,” Peters said.
Additionally, the AEI report found that FHA loans have a Mortgage Default Risk of 31% as of September 2019.