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FHA loans could face “tidal wave of defaults”

All indices hit series high

The National Mortgage Risk Index for Agency purchase loans rose in November to 11.69%, up from the average of 11.29% for the prior three months, according to the American Enterprise Institute’s International Center on Housing Risk.

The risk indices for Fannie Mae, Freddie Mac, the FHA, and the VA all hit series highs in November.  

"The increase in risk for all the major government agencies over the past two years is cause for concern," said Stephen Oliner, co-director of AEI's center. "This is especially true for FHA loans, which would experience a tidal wave of defaults if we have another severe financial crisis."  

The November results are based on 208,000 home purchase loans, nearly the universe of such loans with a government guarantee.  With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 moved above 5 million.  

Other notable takeaways from the November NMRI include the following:

  • There continues to be little discernible volume impact from the QM regulation: over the past 3 months, 23% of loans had a total DTI above 43%, up a shade from the share in 2013:H2. 
  • FHA is not compensating for the riskiness of its high DTI loans; Fannie and Freddie are compensating only to a limited extent.
  • Fannie is not compensating for the riskiness of its 97%% CLTV loans, having acquired 68,000 such loans over the last 25 months.
  • Major shifts have occurred in originator type, with non-bank lenders now accounting for over 50 percent of agency securitizations and demonstrating increasing risk levels.  Fed and OCC surveys have failed to capture these trends. 
  • FHA’s NMRI stood at 24.26% in November, up 0.3 percentage point from the average for the prior three months (revised).   The November level is 1.7 percentage points  higher than a year earlier and 3.4 percentage points higher than two years ago. The high level risks fueling home price volatility, particularly in lower income and minority areas.
  • The softness in mortgage lending is not due to tight standards but to reduced affordability, loan put back risk, and slow income growth for many households. 

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