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.
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.
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.