Potential Mortgage Default Risk Remains High

Despite a slight pullback in March, risk in the mortgage marketplace remains perilously high, say researchers.

The American Enterprise Institute’s (AEI) International Center on Housing Risk released this week its latest National Mortgage Risk Index (NMRI), a measure of likely loan default risk rates in the event of another economic crisis. For its March data, the group calculated that under stress, 11.5 percent of recent home purchase mortgages would default, just down from 11.6 percent in February.

Even with the decline—the second consecutive drop—potential default rates remain nearly double the 6 percent maximum AEI says is conducive to a stable market, suggesting there’s been no “discernible impact from QM [Qualified Mortgage] regulation,” the group asserts.

As AEI points out, while all of the purchase loans covered in its index classify as QM, half have a down payment of 5 percent or less, and nearly one-quarter have total debt-to-income (DTI) ratios exceeding 43 percent. Federally guaranteed loans are exempt from the 43 percent cutoff.

“High DTI loans are risky, with a stressed default rate well above that for all loans regardless of DTI,” analysts said.

Also troubling is the fact that while the composite index was down over the month, expected default rates among loans held by Fannie Mae and Freddie Mac continued to climb up to 6 percent, while the rate for loans insured by the Federal Housing Administration (FHA) and Rural Housing Services (RHS) inched up to 24.1 percent. Both values represent new highs for each category.

Explaining the decline in the headline index, AEI noted the share of high-risk loans decreased again, hovering just above 35 percent, partially due to a fall in FHA loan share.

Ahead, the Center on Housing Risk sees no let-up in risk rates, especially as lenders—and some regulators—move to open up credit standards to allow more borrowers in.

“In a housing boom, mortgage lending moves out the credit curve,” the group said. “Credit risk is rising as political pressures are again pushing for degrading lending practices.”

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