Mortgage Loan Risk Flat in August

The American Enterprise Institute's (AEI) measure of risk in the mortgage market stayed mostly level in August, with government-insured loans carrying most of the risk, the group reported Monday.

AEI's National Mortgage Risk Index measured 11.3 percent last month, little changed from July's index, the group said. As a stress test, the index measures the percentage of loans that would be at risk of turning sour in the event of an economic downturn.

Though the index has come down in recent months, it remains nearly twice the acceptable level "conducive to a stable market," AEI said.

The worst score was seen among loans insured by the Federal Housing Administration (FHA), which had an index value of 23.8 percent in August, nearly four times what AEI considers a stable level. The index's other component gauge, which tracks loans purchased or guaranteed by Fannie Mae and Freddie Mac, measured an even 6.0 percent in August.

"The FHA index is extremely high, in sharp contrast with its safe underwriting practices between 1935 and 1955," AEI said in its report.

Scholars at the think tank have been vocal in their criticism of FHA's underwriting policies, especially as the agency works to rebuild its insurance fund following its first-ever bailout last year. With FHA's recent launch of a new initiative to open up credit access for more borrowers, those criticisms have grown.

"FHA has not stood for sustainable homeownership for at least five decades. It has failed in that regard," said Edward Pinto, resident fellow and co-director of AEI's International Center on Housing Risk, in response. "As evidenced from 1977 to 2012, one in eight FHA families ended up having a claim for insurance due to foreclosure or insurance from events that left the family's dreams shattered."

As an answer to FHA role in helping low- and moderate-income families obtain home financing, the co-directors of the International Center on Housing Risk recently proposed a new "Wealth Building Home Loan" (WBHL), which would feature a 15-year fixed-rate loan with a monthly payment rivaling its 30-year counterpart.

Among other key features, the WBHL would also require little or no down payment, focus on a broad credit box, and offer versions designed for low-income borrowers that would deliver nearly all of the buying power of a 30-year FHA loan.

In a recent post on the Housing Risk Center website, Pinto said that he and co-director Stephen Oliner designed the newly proposed loan to serve the twin goals of providing a broad range of homebuyers with a means of building wealth while maintaining the purchasing power of a 30-year mortgage.

"While the WBHL is designed to reduce default risk for all borrowers, this is a critical importance for borrowers with FICO scores in the range of 600–660," Pinto said. "The WBHL will help these borrowers reliably and sustainably build wealth."