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Mortgage Risk Levels Remain Elevated in October

housing-collapseLoan risk in the mortgage market stayed more or less flat from September to October, remaining at nearly double the historical stable level, according to a report.

The American Enterprise Institute's (AEI) National Mortgage Risk Index for home purchase loans stood at 11.4 percent in October, little changed from the previous three-month average but nearly 1 percentage point above its year-ago level, the group said Monday.

The index measures the percentage of purchase loans that would be at risk of default in the event of another economic downturn. According to AEI, an index value of less than 6 percent is "indicative of conditions conducive to a stable market."

Among the nearly 4.8 million mortgages measured in October's index, 44.7 percent were made to first-time homebuyers. The risk reading for these loans came in slightly higher than the composite index at 14.5 percent.

AEI said the elevated level of risk for that group stemmed largely from the concentration of mortgages insured by the Federal Housing Administration (FHA), as few first-time buyers have the money needed to make a standard down payment.

The risk index for all FHA loans registered 24.2 percent in October, up 2 percentage points from a year ago and "modestly higher" than the average of the last three months, AEI reported.

"This extremely high level of risk indicates that FHA loans would perform poorly in a serious stress event, fueling home price volatility, particularly in lower income and minority areas," the group said.

Meanwhile, the index gauging loan risk among mortgages purchased by Fannie Mae and Freddie Mac remained level at 6 percent.

Despite the relative stability in the Fannie/Freddie index, AEI says the GSEs—like FHA—aren't doing enough to monitor and compensate for the number of high debt-to-income ratio loans being originated today. While the Consumer Financial Protection Bureau's qualified mortgage (QM) guidelines instituted a 43 percent debt-to-income limit for protected loans, there is an exemption for mortgages insured by FHA or approved by the GSEs.

"There continues to be little discernible volume impact from the QM regulations on the share of loans, with 22.5 percent of loans having total debt-to-income ratios over 43 percent," AEI said.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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