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Government on the Hook for Larger Pool of Loans

seal-on-moneyThe data reported on the housing industry in the last few days has been less than promising—tight inventory combined with near double-digit home price appreciation, a slower pace of existing-home sales from NAR, and a surprisingly disappointing new home sales report from HUD and the Census Bureau.

Default risk is on the upswing as well. The composite Agency National Mortgage Risk Index (NMRI) for January 2016 released by AEI’s International Center for Housing Risk on Wednesday, covering both purchase loans and refinances, climbed by almost half of a percentage point (0.44) up to 11.70 percent for January 2016. This increase continues an upward trend that is 25 months long and counting—the NMRI has now risen year-over-year every month since January 2014.

The Agency NMRI covers 18.2 million mortgage loans with a government guarantee dating back to November 2012 (8.3 million Agency purchase loans and 9.9 million Agency refinance loans). The index measures how government-guaranteed loans with a first payment date in a given month would perform under the same adverse economic conditions experienced during the financial crisis of 2007-08. An NMRI value of 11.70 percent for a set of loans indicates that 11.70 percent of those loans would default under such adverse economic conditions.

“The NMRI data along with the NAR’s February 23 existing home sales release showing both an 8.2 percent year-over-year increase in median existing home prices and a seller’s market that has now entered its 41st month, confirms home prices are rising at unsustainable levels, feed by low interest rates, continued credit easing, and moderate economic growth,” said Edward Pinto, codirector of AEI's International Center on Housing Risk. “As NAR’s chief economist warned: ‘Home prices ascending near or above double-digit appreciation aren’t healthy—especially considering the fact that household income and wages are barely rising.’”

Within the composite NMRI, the index for Agency purchase loans rose by 0.33 percentage points year-over-year up to 12.23 percent for January 2016. For Agency refinance mortgages, the risk index climbed by more than half a percentage point (0.58) up to 11.10 percent, according to AEI.

The upward trend in the NMRI for Agency purchase loans is largely driven by a shift in market share of Agency purchase loan originations from banks to nonbanks in January. AEI reported that the large-bank share of purchase loans declined from 22.6 percent in December down to 17.3 percent in January. In November 2012, the large-bank share of purchase loans was at 65 percent. Nonbank lending is substantially riskier than the bank business it replaces, according to AEI.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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