The default risk for mortgage loan originations rose in January, marking the fifth straight month-over-month increase, according to the composite National Mortgage Risk Index (NMRI) released by AEI's International Center on Housing Risk.
In January, the NMRI for Agency purchase loans increased to a series high of 11.94 percent. That number represented an increase of 0.4 percentage points from the October through December average and a jump of 0.8 percentage points from January 2014.
"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, co-director of AEI's International Center on Housing Risk.
Default risk indices for Fannie Mae, FHA, and VA loans hit series highs within the composite, according to AEI. The firm attributes to the consistent monthly increases in risk indices to a substantial shift in market share from large banks to non-bank accounts, since the default risk tends to be greater on loans originated by non-bank lenders.
AEI's study for January revealed that the volume of high debt-to-income (DTI) loans has not been reduced by the QM regulation. About 24 percent of loans over the past three months had a total DTI above 43 percent, compared to 22 percent for the same period a year earlier. The study also found that Fannie Mae and Freddie Mac were compensating to a limited extent for the riskiness of their high DTI loans.
Further, the NMRI for FHA loans in January experienced a year-over-year increase of 1.5 percentage points up to 24.41 percent – meaning that nearly one quarter of all recently guaranteed home purchase loans backed by FHA would be projected to default if they were to experience an economic shock similar to 2007-08. AEI estimates that if FHA were to adopt VA's risk management practices, the composite index would fall to about 9 percent.
"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, co-director of AEI's International Center on Housing Risk. "Recent policy moves by the FHA and FHFA will likely exacerbate this trend."
AEI said the cause of the softness in mortgage lending is not tight lending standards, but rather reduced affordability, loan put back risk, and slow income growth among households.
More than 180,o00 home purchase loans were evaluated for the January results, bringing the total number of loans rated in the NMRI since December 2012 to nearly 5.5 million, according to AEI.