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Government Expands Mortgage Credit Access, Private Market Still Clenched

Mortgage credit availability is at its highest level in five years, but there is plenty of room for growth, according to a recent report from the Urban Institute’s Housing Finance Policy Center. The Center noted that most of the recent expansion in credit availability has come from government loan channels and government-sponsored enterprises.

During the fourth quarter of 2017, mortgage credit availability grew with mortgage loan default risk rising from 5.6 percent to 5.8 percent, according to The Housing Finance Policy Center’s Housing Credit Availability Index (HCAI). The Center also noted that the increase was the second quarterly rise in a row.

The HCAI reveals how much default risk the market holds as a means of determining how accessible credit is. However, “Significant space remains to safely expand the credit box,” the Policy Center stated in its report. “If the current default risk was doubled across all channels, the risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

While all areas have room for growth, the private-label securities market has the most room for growth, continuing to wallow near record-low default risk levels, according to the report.

During the housing bubble leading up to the financial crisis, the private market took on more risk than either the GSEs or government loan channels, which includes Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture and Rural Development.

Private market risk plummeted after the crisis and remains below the levels take on by the GSEs and government programs today.

In the fourth quarter of 2017, the portfolio and private-label securities market held 2.3 percent default risk. This compares to 2.9 percent default risk at the GSEs and 11.2 percent default risk among government loan programs.

All three sectors took on more risk in the fourth quarter than the previous quarter with government loans demonstrating the sharpest increase, from 9.8 percent in the third quarter to 11.2 percent in the fourth.

Risk at the GSEs rose from 2.5 percent to 2.9 percent, and the Center noted, the rate has more than doubled since the second quarter of 2011.

The private label market experienced a meager rise from 2.29 percent to 2.31 percent in the fourth quarter.

The HCAI breaks risk down into two components—product risk and borrower risk—in order to determine whether default risk is a result of a risky loan or a risky borrower. The Housing Finance Policy Center states the housing bubble was largely the result of product risk rather than borrower risk.

While the market has demonstrated aversion to both types of risk since the financial crisis, product risk has all but vanished. For the portfolio and private-label sector, default in Q4 2017 was composed of about 0.2 percent product risk and about 2.1 percent borrower risk.

Historically, borrower risk has generally composed the lion’s share or risk at the GSEs and for government loan programs, while private labels took on a slightly more balanced share of each type of risk. At its peak level of risk, in the first quarter of 2006, the private market held 21.8 percent default risk, composed of 12.5 percent borrower risk and about 9.3 percent product risk.

By the first quarter of 2009, the private label market held less than 1 percent product risk, and it has not risen above 1 percent since. The market as a whole currently holds 0.03 percent product risk and has remained below 1 percent since the first quarter of 2008.

Examining the pre-crisis period between 2001 and 2003, which the Housing Finance Policy Center referenced for its ¨pre-crisis standard¨ default level of 12.5 percent; we calculate the average product risk exposure for the overall market was 3.4 percent. The private market took on a product risk rate of 6.9 percent, a drastic contrast to today´s rate of 0.2 percent.

About Author: Krista Franks Brock

Krista Franks Brock is a writer and editor who has covered the mortgage banking and default servicing industries since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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