A shift in market share from large banks to nonbanks accounted for a slight increase in the National Mortgage Risk Index for February as well as series-high levels for the risk indices for Fannie Mae/Freddie Mac, FHA, and VA loans within the composite index, according to data released Wednesday by AEI's International Center on Housing Risk. The across-the-board increases in default risk can be attributed to the risk associated with nonbank lending, which is substantially higher than that of big bank loans.
The NMRI for FHA loans in February reached a series high of 24.48 percent, which indicates that recently guaranteed home purchase loans backed by FHA would be projected to default if they were to experience an economic shock similar to the 2007-08 financial crisis. AEI estimates that if FHA were to adopt VA's risk management practices, the composite index would fall to about 9 percent. The report also found that FHA is not compensating for the riskiness of its high DTI ratio loans.
A key government official indicated in a speech Wednesday that GSE reform is unlikely for the next two years and that Fannie Mae and Freddie Mac will likely remain under conservatorship of the Federal Housing Finance Agency for the time being. U.S. Senator Richard Shelby, the chairman of the Senate Banking Committee, said in his speech Wednesday at the U.S. Chamber of Commerce Conference in Washington, D.C., that he would rather leave the two GSEs under control of the FHFA than to replace them with a private insurance company system with a government backstop.