Housing Risk Watch, February 2014

Article Highlights

  • Only 42% of new purchase loans are low-risk, and the share has declined steadily since August.

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  • The small percentage of low-risk loans would add measurably to market instability in the event of a recession.

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  • The trend of increasing risk for GSEs and the FHA does not bode well for the future.

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This Issue’s Highlight

High Loan Risk Is Damaging Long-Run Market Stability

The January National Mortgage Risk Index (NMRI) for home purchase loans shows that low-risk loans accounted for only 42.2 percent of home mortgages extended in January 2014, down from 45.4 percent in December 2013 and 46.4 percent in August 2013 (the starting date for this series). Loan risk is at a higher level than is conducive to long-run market stability. Despite frequent assertions by the National Association of Realtors and other interest groups that the national credit box is too tight, the facts indicate it is loose by historical standards for prudent lending and is getting looser.

This Month’s Features

High Loan Risk Is Damaging Long-Run Market Stability
Less Than Half of Federally Guaranteed Home Mortgages Are Low-Risk

Fannie May, but Freddie Won’t (As Much)
Fannie Leads Freddie in Increase in Risk

Spotlight on Best Price Execution
Improvement in Ginnie Execution versus Fannie Pads Ginnie Agency Price Advantage

Spotlight on FHA Insolvency
FHA’s Private GAAP-Estimated Net Worth Declines to Lowest Level since February 2013

Spotlight on FHA Delinquency
Overall Rate Drops to Lowest Level since May 2013

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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