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Mortgage Risk Continues to Climb

Last month’s implementation of the Consumer Financial Protection Bureau’s (CFPB) qualified mortgage (QM) guidelines did little to stem the rise of mortgage risk across the nation, according to the latest from the American Enterprise Institute (AEI).

The group’s National Mortgage Risk Index (NMRI), a measure of loan performance under stressful economic conditions, increased to a reading of 11.8 percent in January from 10.6 percent at the end of 2013.

The index saw the greatest lift from a rise in the share of purchase loans backed by the government, which was up to 33 percent. The stressed default rate among those loans increased to 23.7 percent. Isolating only loans backed by the Federal Housing Administration (FHA), the default rate was 24.4 percent.

Among loans sold to Fannie Mae and Freddie Mac, the stressed default rate was 5.8 percent; an index value of 6 or lower is “indicative of conditions conducive to a stable market,” AEI said.

In addition to FHA’s elevated presence in the market, AEI fellow and index co-creator Edward Pinto linked last month’s increase in risk to reports of lenders loosening credit standards—including the revelation that Wells Fargo has dipped its toes back into subprime waters.

“What’s really going on here is that means they’ve lowered the floor on their FHA lending ... again, I believe responding to political pressure from HUD and FHA,” Pinto said in a press call.

AEI also released for the first its State-Level Mortgage Risk Index (SMRI), which showed Mississippi topping the ranks in terms of stressed default risk with an index score above 15 percent. Louisiana followed with a reading near 14 percent, while a number of states ranged between 12-13 percent.

Most of those high-ranking states also have the highest concentration of government-insured mortgages.

“In Mississippi, half the loans that were originated in this three-month period were FHA loans,” remarked Stephen Oliner, resident scholar for AEI and the other creative mind behind the index.

Hawaii was the least risky state last month, though its own index still came in above AEI’s “safe” level of 6 percent.

Compared to December, only three states experienced a decline in default risk: Hawaii, Arkansas, and North Dakota. South Dakota remained more or less flat from where it was, while every other state saw their respective indexes climb.

“It’s clear that the national pattern we see is very, very widespread across the country,” Oliner said.

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