The mortgage market could have taken twice the default risk during the first three quarters of 2014 and remained well within the high standards set from 2001 to 2003, according to data released by the Urban Institute on Monday.
An analysis of the Housing Finance Policy Center's Credit Availability Index (HCAI) by Wei Li and Laurie Goodman of the Urban Institute's Housing Finance Policy Center revealed that there was no change in the market's post-crisis overcorrection during the first three quarters of 2014. Rather, the study showed a reluctance on the part of lenders to accept any real borrower risk and a continued absence of loans with risky terms, according to the study.
The HCAI was first introduced by the Housing Finance Policy Center in December to measure the amount of default risk the mortgage market takes on at origination for owner-occupied purchase loans and how much of the risk is due to either loan type or credit risk on the part of the borrower. Default risk is defined as the likelihood that a mortgage loan will go 90 days or more delinquent, with the understanding that not all loans that go 90 days delinquent will end up in foreclosure or liquidation.
The latest HCAI analysis of the first three quarters of 2014 showed that 5 percent of all mortgages originated during that period were likely to default under conditions considered over all economic scenarios, while 6.4 percent of loans originated between 2010 and 2013 were likely to default when placed under the same economic conditions. The lower probability for default for loans originated in 2014 compared to those originated from 2010 to 2013 indicates a tighter credit box in 2014 compared to the three years prior.
Compared with loans originated during 2001 and 2003, which was a time of balanced credit access and default risk, mortgage loans had a default probability of 12.4 percent under similar economic conditions that measured default probability for loans originated in 2014 and 2010 to 2013. When considering just borrower risk, the default likelihood for loans originated to 2001 to 2003 fell to 9.1 percent, while 3.4 percent of the default risk for loans during that time was attributable to risky products.
Li and Goodman concluded that due to the complete absence of risky products in today's mortgage market, doubling the default risk on loans originated in 2014 (5 percent) would still put risk well within the cautious 2001 to 2003 standards.