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Sub-prise! Mortgages get looser despite tighter regulations

AEI: National Mortgage Risk Index continues to climb

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Concerns that potential mortgage borrowers would be pushed out of the housing market due to new lending regulations and standards are unfounded, according to the latest housing risk briefing from the American Enterprise Institute's International Center on Housing Risk.

Co-directors Edward Pinto and Stephen Oliner gave a monthly update on the National Mortgage Risk Index, which continued to climb in January. The index is the proprietary product of AEI, and measures the origination and servicing of government-connected mortgages.

“QM does not provide the protection it was advertised to. It does not prevent any of the risky loans in the default levels from being made today,” Oliner said on a conference call, summing up the meaning behind the index's latest results.

Several reports, like this one from CoreLogic, created concerns since credit is tight for low-credit-score borrowers — those who don’t want to or can’t fully document their credit responsibly and/or those who would prefer an adjustable-rate mortgage.

But according to the briefing, “Despite frequent assertions that the national credit box is too tight, the facts indicate it is loose by historical standards for prudent lending and is getting looser.”

Need proof? The composite risk index increased again in January primarily due to an increase in the FHA’s market share and a general upward trend in percentage loans with a FICO below 660. And while this is substantially above the 1990 level, it is not approaching 2007 level when underwriting was exceptionally lax.

The main cause for concern: loan risk level is higher than what is conducive to long-run market stability. Low-risk loans accounted for 42.2% of January activity, compared to 45.4% in December and 46.4% in August 2013.

Meanwhile, high-risk loans — loans with a stress default rate 12% or higher — jumped from around 33% to roughly 38%.

This follows a recent announcement from Wells Fargo (WFC) at the beginning of February that it decided to move its minimum FICO requirement on Federal Housing Administration mortgage loans to 600 from 640 for retail purchase customers.

With this in mind, AEI highlights that the new QM guidelines are likely to fall short on risk restraint when compared to the expectations of the Consumer Financial Protection Bureau.

However, there are political pressures pushing risk higher, Oliner explained.

“You have agencies saying that you need to make the credit box wider, and you need more risk and more leverage into the market,” Oliner continued. “And that increased risk tends to drive up house prices, but you get that cycle back in the 90s that as the house prices go up you get even more loosening of credit. It is definitely a cautionary note.”

In addition to the NMRI, AEI also put out its first state-level mortgage risk index, which follows the same methodology as the NMRI.  

Most states recorded a composite SMRI between 9.5% and 12.5%. The ones with extremes tended to have high or low concentration of FHA/RHS loans.

“The bottom line of the national and state index is that housing risk is growing. This is not a time to be complacent but to watch what is going on in the market very closely,” Pinto said.

“We think these trends are trends that will continue for some time given the push from policy makers,” Oliner added. 

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