Although the Qualified Mortgage and ability-to-repay rules are designed to halt excessively risky lending, the new guidelines are likely to fall short on risk restraint when comparing their reality to the expectations of the Consumer Financial Protection Bureau, said Ed Pinto, resident fellow and co-director of the American Enterprise Institute’s International Center on Housing Risk.

"While they have cut back on certain factors like interest-only loans and negative amortization, they have left the credit box in terms of the basics like LTV (loan-to-value ratio) and DTI (debt-to-income) wide open," Pinto said during the center’s monthly National Mortgage Risk Index update.

Pinto explained that just comparing the lowest risk bucket of loans to the highest under QM shows a 200 times greater risk.

According to the NMRI, all indexes are high relative to prudent lending standards and have trended up. The Fannie Mae and Freddie Mac index increased from 4.9% to 5.8%, while the FHA/RHS index escalated from 22.2% to 23.5%. In addition, the composite index grew from 10.6% to 10.8%.

Pinto noted that in order to understand the situation the housing market is in people need to compare it to a benchmark established in the early 1990s for traditional standards.

"Based on our research, the FHA had a very high percent of low-risk loans back in their first 20 years, yet the homeownership rate soared in that period from 1940s to 1960s," Pinto said.

"Homeownership has stagnated since 1960 except in the early 90s, but that was unsustainable. Low risk lending would help homeownership increase over time," he added.  

This year will be heavily shaped by how banks react to the new QM rules and regulations. "They will probably be more cautious starting the first half of this year and then be more comfortable the second half of the year, which could slow the market down in general," Jeff Taylor, managing partner at Digital Risk said.

But a big part of the housing market’s future also stems from the actions of Federal Housing Finance Agency Director Mel Watt.

"The new director will take fewer steps to promote the return of private capital," Pinto said. "He is being pushed very hard to fund the housing trust fund, which could be a fairly sustainable fund and get distributed to many groups."

"As Watt implements his policies and the Federal Housing Administration presumably moves downstream to higher risks, which they have talked about for some time, and if they get lenders to follow suit, you would see an increasing credit risk index as those policies take hold," Pinto explained.  

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