TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 37 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 surges in Final april index Critics say Fannie, Freddie, and FhA are being too loose with debt-to-income ratios. a ccording to the latest report, the American Enterprise Insti- tute's (AEI) National Mortgage Risk Index (NMRI), a measure of loan default risk under stressful conditions, increased to 11.9 percent for April, up nearly half a percentage point from March. A value of less than 6 per- cent is what the institute consid- ers "conducive to a stable market." According to AEI, last April's rising index was caused largely by the Federal Housing Administration (FHA) and Rural Housing Services (RHS) increas- ing their market share, which was up to an estimated 32.2 percent in April. The agency recently announced a plan to expand credit access by offering savings to borrowers who commit to housing counseling—a strategy that drew criticism from Edward Pinto, resident fellow at AEI and co-director of the Center on Housing Risk. "The direction that both FHA and FHFA [the Federal Housing Finance Agency] are going, based on their announcements, is to move the mortgage market down the slope of greater risk with more unsustainable loans," Pinto remarked at the time. Also contributing to April's record index was a rise in loans with debt-to-income (DTI) ratios exceeding 43 percent, the maxi- mum threshold for a loan under the Qualified Mortgage umbrella. Thanks to a temporary exemption, loans qualified for purchase by the GSEs or insured by FHA can sur- pass that limit—and nearly a quarter of them do, according to AEI. "None of the agencies are com- pensating in a substantial way for the high risk that is entailed with loans that have high DTI ratios," said Stephen Oliner, resident scholar at AEI and also co-director for the Center on Housing Risk. In a press call, the two co- directors also disputed claims that lending standards must be expanded to aid the housing recovery, arguing that softness in today's mortgage market is due to higher interest rates, rising home prices, a sluggish economic recov- ery, and the lingering impact of last decade's financial crisis—not tight lending criteria. With both FHA and FHFA signaling a shift in focus toward opening up credit for more bor- rowers, the researchers once again warned against setting the bar too low, citing concerns about loan risk and home price volatility. "In a boom, mortgage lending moves out the credit curve," Pinto said in a press call last month. "This is particularly dangerous when accompanied by renewed political and regulatory pressures for debased lending standards." mortgage credit availability increases Credit access bumped up as jumbo and FhA loans became more available. T he Mortgage Bankers Association's (MBA) Mortgage Credit Availability Index (MCAI), a monthly gauge of credit access based on metrics and underwrit- ing criteria from more than 85 lenders, increased 1.14 percent from April to May, reading 115.1 in the latest measure. The index was benchmarked at 100 in March 2012. It would have read roughly 800 if the tracking measure had existed in 2007, MBA says. According to the group, May's gain came "partially as a result of a slight increase in the availability of jumbo loans," as well as "the action by some investors to lower credit score requirements on FHA [Federal Housing Administration] loans." Meanwhile, the agency itself unveiled plans in May to expand credit access for borrowers with lower credit scores while offering counseling to reduce risk. The topic of credit availability has drawn debate from all sides. In early May, both the Federal Reserve and the Urban Institute found that rela- tively few lenders have made moves to expand their standards on the low end of credit. Researchers at the institute assert any reported decline in lending criteria is due to a market shift between GSE loans and those backed by FHA. At the same time, critics of the cur- rent call to open up lending say the environment remains too risky. In its latest National Mortgage Risk Index, the American Enterprise Institute (AEI) reported a record high in the share of loans at risk of default in the event of an economic crisis, arguing that Qualified Mortgage require- ments—particularly those related to debt-to-income (DTI) ratios—have done little to mitigate risk, especially because GSE and FHA loans have a temporary exemption. "None of the agencies are compen- sating in a substantial way for the high risk that is entailed with loans that have high DTI ratios," said Stephen Oliner, resident scholar at AEI, in a press call at the time.