Taking the Bait

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42 | Th e M Rep o RT o r i g i nat i o n s e r v i c i n g a na ly t i c s s e c o n da r y M a r k e t ORIGINATION the latest loan risk index rises to new High A first look at April data suggests FhA is taking greater chances. a n early look at April purchase lending sug- gests mortgage risk has turned up sharply as the Federal Housing Adminis- tration (FHA) takes more of the market. The American Enterprise Institute (AEI) put out a "flash release" of its National Mortgage Risk Index (NMRI), a measure of the likelihood of purchase loan defaults under stressful economic conditions. The full index, which features a more complete look at data, was released May 27. According to the group, the in- dex climbed in April to 11.89, in- dicating nearly 12 percent of loans would be at risk of default in the event of another downturn. That figure is up from a reading of 11.5 percent in March and represents a series high for the index. AEI's Center on Housing Risk, which produces the monthly index, said the spike was "due to FHA, which had higher market share and increasing loan level risk." According to the research- ers, FHA's home purchase volume in April came to an estimated 41,756, increasing 36 percent over March. At the same time, Fannie Mae and Freddie Mac together had home purchase volume of 101,050 in April, an increase of just 24 percent. Overall, AEI reports purchase volumes were up 27 percent month-to-month, "the result of the spring buying season ramp- ing up." Breaking down risk across each segment, the April NMRI for FHA loans was 25.12 percent, up from 24.77 percent in March and a new high for that category. Meanwhile, the index for GSE loans fell slightly to 5.93 percent, dropping below the 6 percent maximum AEI said "is indica- tive of conditions conducive to a stable national market." AEI's preliminary index data comes only days after the Mortgage Bankers Association's (MBA) most recent look at credit availability, which report- edly tightened in April following nearly half a year of loosening. While a growing number of lend- ers say they have followed tighter lending practices as a result of this year's Qualified Mortgage rules, AEI maintains the guidelines have actually had little effect, especially as FHA and GSE loans remain exempt from rules establishing a 43 percent maximum debt-to- income threshold. First-Quarter refinance stats Point to equity Build-Up Shorter loan termS and fewer caSh-outS SuggeSt borrowerS are thinking about their home equity. F reddie mac released the results of its first-quarter refinance analysis, with findings showing a growing num- ber of borrowers choosing to refinance into shorter loan terms as home equity grows nationwide. according to the enterprise's report, 39 percent of refinancers in q1 chose to shorten their term, up slightly over the prior quarter and the highest share since 1992. at the same time, an estimated $6.5 billion in net home equity was cashed out during conventional prime-credit refinances in q1, flat from q4 2013 and down from year-ago levels—even as the share of borrowers extracting home equity rose, notes frank nothaft, chief economist for freddie mac. "roughly 17 percent of borrowers who refinanced in the first quarter chose to extract home equity versus 14 percent from the same time last year," nothaft said. "however, even with the slight increase in the cash-out share, it's still $2 billion less compared to the first quarter of last year simply because the refinance share of origina- tions continues to plummet." together, the rise in shorter terms and the relatively low cash-out share suggest borrowers are seeking to strengthen their own equity positions as home values continue to rise. in total, u.S. home equity expanded by an estimated $2.1 trillion over the course of 2013, according to the federal reserve. the average mortgage interest rate reduction in q1 was 1.4 percentage points, meaning a savings of about 24 percent on average. on a $200,000 loan, freddie mac estimates refinancers taking the average interest reduction will save $2,800 over the next year. for those who refinanced through the home affordable refinance Program (harP), the average re- duction was 1.6 percentage points, creating average savings of $3,200 over the year. overall, the company says borrowers will save on net more than $1 billion in interest payments in the next 12 months. overall, AeI reports purchase volumes were up 27 percent month- to-month, "the result of the spring buying season ramping up."

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