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Riskiness of U.S. loans continued to rise in Q4

U.S. loans got riskier at the end of last year as the federal government encouraged looser credit and nonbanks continued their rise in mortgage lending, according to American Enterprise Institute's (AEI's) International Center on Housing Risk.

AEI’s National Mortgage Index increased to 11.97 percent in January, up 0.4 percent for the quarter and 0.8 percent from a year ago. Meanwhile, the index that tracks Federal Housing Administration-backed loans jumped to 24.41 percent, up 1.5 percent year over year. This means that AEI estimates that nearly 12 percent of all loans that it tracks and nearly a quarter of FHA-backed loans would fail in a severe recession similar to the financial crisis of 2007-2008.

Stephen Oliner, the center’s co-director, said in a morning briefing on Monday that credit remains loose. 

“We continue to find that the QM [Qualified Mortgage] regulation has not been reducing the volume of loans of high-debt-to-income ratio,” Oliner said. “Over the past three months, nearly a quarter of loans had a debt-to-income ratio above the nominal QM limit of 43 percent, which is a few percentages above the share of new loans in the half year before the QM regulation went into play.”

AEI's position that credit is overly loose conflicts with most banking and housing industry trade groups, and the Obama administration, which have contended that tight credit restrictions are holding back home sales, particularly for first-time homebuyers. The federal government recently cut the insurance premium on FHA loans and has allowed Fannie Mae and Freddie Mac to back conventional loans with as little as 3 percent down.

Adam DeSanctis, spokesman for the National Association of Realtors, told Scotsman Guide News that the trade group will continue to lobby policymakers to make mortgages "more readily available" for buyers and investors.

“Today’s tight credit restrictions are preventing some qualified buyers from becoming homeowners, and making it tougher for some homeowners to sell their homes," DeSanctis said. NAR has also called the recent cut to FHA's insurance premiums "a good balance between pricing for risk and achieving FHA’s goal of helping buyers into homes."

Oliner said that while FHA-backed loans continue to be the riskiest loan class, he doesn't believe that a recent cut in the annual insurance premium will draw that many people into the program. The U.S. Department of Housing and Urban Development (HUD) has estimated that as many 250,000 more first-time homebuyers will apply for FHA-backed loans within the next three years as a result of the 50 basis point cut. Oliner said the cut was “not a big deal” and the movement of interest rates will have a bigger impact on applications.

“FHA guaranteed about half a million first-time homebuyers over the past year out of about 1.25 million first-time homebuyers that had a government guarantee,” Oliner said. He noted that would mean that FHA would have to draw 80,000 more borrowers annually, a 16 percent increase.

“To us, even before this really gets rolling, we think that is extremely implausible under a very optimistic estimate on HUD’s part,” he said.

Oliner and co-director Edward Pinto also are also concerned about the rise of large, nonbank lenders, which they say tend to originate riskier loans and account for more than 50 percent of loan volume. Pinto noted the risk of loans is rising while interest rates remain low.

“At some point [mortgage rates] will go up,” Pinto said. “When they go up, that will put the market under some stress, and the response is going to be either to loosen credit further, or it is going to result in some impact on house prices, potentially both.”


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