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Loan risk remains stable, nonbanks continue riskier lending

The overall default risk of U.S. loans remained essentially the same in February, but risk-taking nonbanks continue to scoop up business from large banks, the AEI International Center on Housing Risk reported on Tuesday.

AEI’s National Risk Index increased to 11.93 percent, up just 0.1 percent for the month. That means, according to the think tank, that nearly 12 percent of the 5.7 million loans that the Center has evaluated for risk would be expected to default within five years of a catastrophic shock as in the 2007-08 downturn.

Of all loan types, Federal Housing Administration (FHA) loans have the highest default risk, according to the Center. Nearly a quarter of these loans would be expected to default during a bad downturn, the Center said.

Year-over-year, the index was up 0.8 percent. The indices that track the riskiness of FHA, Fannie Mae and Freddie Mac-backed loans, and Veterans Affairs, all hit series highs in February, the Center reported.

In a morning briefing, Co-Director Stephen Oliner said that nonbanks have filled the void left by large banks and credit unions, which haven’t been willing to do riskier loans.  Nonbanks have grabbed more than half the market share, and their rise has corresponded with a nearly point-for-point decline in the large bank share, the Center said. 

“The nonbanks are doing riskier lending and that is clear,” Oliner said. Oliner added that if banks want to regain lost market share in FHA loan or other riskier products, they will have to go farther out on the risk spectrum. 


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