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Mortgage Default Risk Index Hits Highest Level in Two Years

American Enterprise Institute Mortgage Default Risk IndexNovember's mortgage default risk index was reported at 11.69 percent, its highest level in two years, according to a briefing released by the American Enterprise Institute's International Center on Housing Risk.

The November default risk index crept upward by 0.4 percentage points from October, when it was reported at 11.29 percent. The goal of the index is to measure the default risk of mortgages by comparing recently originated loans to those with a 2007 vintage and determining what percentage of the more recently originated loans would fail under conditions similar to those during the 2007 housing crisis, according to the briefing.

AEI scholars Edward Pinto and Stephen Oliner, the authors of the index, estimate that even though the index is at a two-year high, it is close to half of its 2007 level during the height of the crisis. They estimate the index would have been about 19 percent during 2007, while a reading in a stable market would be about 6 percent – matching  mortgage risk levels from the early 1990s.

The index is comprised of an average of three months of readings and measures default risk for mortgages backed by various federal government programs and by Fannie Mae and Freddie Mac. The index included about 208,000 new loans for November and is comprised of 5.06 million loans total, according to the briefing.

The most risky loans were those backed by the Federal Housing Administration (FHA), which registered an index reading of 24.26 percent for November (an increase from 24.17 percent in October). The Department of Veterans Affairs (VA) index reading was at 11.44 percent, according to the briefing. Pinto and Oliner noted that risk for FHA loans would be substantially lower (9 percentage points) if those loans used the same underwriting criteria as the VA, namely the calculation of residual income.

A composite of Fannie Mae and Freddie Mac loans earned a score of 6.12 percent for November's index, a slight increase from October's reading of 6.06, according to the briefing.

A slowdown in large-bank mortgage lending activity mean an increase in the share of mortgage risk for non-bank mortgage lenders in November, according to the briefing. Non-bank-originated loans, which accounted for about 53 percent of November's origination activity, had an default risk index reading of 13.5 percent. By comparison, large banks accounted for about 30 percent of originations and registered a reading of 10.5 percent on the index, the briefing reported.

No state was below the "stable market" index reading of 6 percent for November, according to the briefing. The states with the three lowest readings were Hawaii (8.9 percent), Vermont (9.1 percent), and Oregon (9.3 percent). The three states with the highest readings were Mississippi (14.5 percent), Louisiana (13.7 percent), and West Virginia (13.2 percent). Nineteen states had readings higher than the national average of 11.69 percent.

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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