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Mortgage Default Risk Hits Record HIGH

In a disturbing new finding from the American Enterprise Institute (AEI), the risk of purchase loan defaults under stressful economic conditions hit an all-time high in April. The “flash release” put out on Monday showed the National Mortgage Risk Index (NMRI), climbed to 11.89 last month, meaning that nearly 12 percent of loans would be at risk of default in the event of another serious economic downturn. The figure is up from 11.5 in the previous month.[1]

The report said the spike in risk is “due to FHA, which had higher market share and increasing loan level risk.” The volume of FHA’s home purchase loans was up 36 percent over March. Because more of the mortgage loans last month were FHA loans, the overall risk level in the market increased, as FHA loans are generally considered riskier than conventional loans. The NMRI for FHA loans was 25.12 percent, suggesting that nearly a quarter of the new FHA loans would be at risk if another economic downturn occurred. The same measure for GSE loans (primarily Fannie Mae and Freddie Mac) was just 5.93 percent. AEI suggests that as long as that number remains below 6 percent, it is “indicative of conditions conductive to a stable national market.” So, while not all the news was bad, most of these measures are either already in dangerous territory or at least near it.[2]

While new Qualified Mortgage (QM) rules have attempted to lessen the risk of another real estate collapse by demanding higher credit standards for borrowers, AEI suggests the new rules have had little effect on making the market any better, as both FHA and GSE loans remain exempt from rules that establish a borrower must have a maximum 43 percent debt-to-income ratio. This means that while a rule was established that no more than 43 percent of a borrower’s monthly income should go towards debt costs (housing debt plus other debt like car loans, credit cards, etc.), those rules are ignored in many of the new loans being made today.

What do you think? If the economy turns down again, is the housing market at risk again of another price collapse? Should the GSEs and FHA be subject to QM rules?

 

3 comments

  1. What caused this massive spike in FHA loans in just one month? The government can’t do anything that fast. Is there an executive order linked to the FHA’s spontaneous turnaround?

  2. Interesting stats, especially if media reporting is correct that FNMA and Freddie are being asked to reduce credit worthiness in an effort to increase the affordable housing market. Listing inventory is low in most markets causing prices to increase beyond where they should be in a stable market–supply and demand in equalibrium. In some markets this is inflating a new bubble. But even price increases have not adequately increased inventory. This is probably due to the lack of equity still prevalent in many homes and not allowing these homeowners to become move up buyers—or to break even.
    I wish the government would not overplay the improving economy. Much of the middle class is still at break even. Any significant jolt to the economy would be dire for the housing market. New home builders have already started to hold back.

  3. I think it would be foolish to enforce new QM rules unless you want to stunt the already band-aided economic growth which coincides with real estate purchases and sustainability of mortgage notes. Lets go back to the grass roots and help the people be in a more suitable and desirable financial condition so that defaults or exceedingly high DTI’s are mitigated. Lets not keep blaming the guys/girls at the other end of the totem pole whom suffer as most have post 2008 while big BUSINESS and BANKS get fatter. Lets strengthen our economy by helping the people by which this country was born and bread by the people. Lets not forget where we all came from and make this a collective rather an individualistic (BIG BUSINESS) recovery. It’s time to stop blaming and start gaining as a Nation not divided rather UNITED.

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