The American Enterprise Institute's [1] (AEI) International Center on Housing Risk [2] reported another rise in mortgage origination risk in January, marking five straight months of increasingly risky lending.
According to AEI, approximately 11.97 percent of agency purchase mortgages originated last month would be at risk of turning sour should the economy experience another shock. January's risk index represented a 0.4 percentage point increase from the prior three-month average and a 0.8 percentage point increase from a year ago.
Within the composite measure, the separate risk indices for Fannie Mae, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA) each hit series highs.
The index level for both Fannie Mae and Freddie Mac moved up slightly to 6.2 percent—just above the 6 percent threshold AEI says is "indicative of conditions conducive to a stable market." The VA measure, meanwhile, climbed to 11.7 percent, while the FHA measure stayed in high-risk territory at 24.4 percent.
Researchers at the International Center on Housing Risk say the rise in risk is due to a shift in market share from large banks to non-banks, whose lending practices are "substantially riskier than the large bank business."
"With the [National Mortgage Risk Index] once again hitting a series high, the risks posed by the government's 85 percent share of the home purchase market continue to rise," said Stephen Oliner, co-director of the center.
The split of loan share between agencies also played a part. According to AEI's data, FHA and Rural Housing Services (RHS) accounted for 29.6 percent of purchase loans in January, up more than half a percentage point from December. With its focus on first-time [3] and other higher-risk borrowers, FHA isn't putting sufficient safeguards in place to manage that risk, AEI says.
It's not the only agency guilty, however: Over the past three months, 24 percent of loans measured in the index had a total debt-to-income (DTI) ratio above 43 percent, the maximum acceptable ratio established under the Consumer Financial Protection Bureau's rules. GSE and FHA loans are temporarily exempt from the DTI threshold.
FHA has failed to compensate for the riskiness of its high-DTI loans, while Fannie and Freddie "are compensating only to a limited extent," AEI said.