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Mortgage Loan Risk Recedes

housing-collapseLoan risk in the agency mortgage market came down slightly in June, but analysts warn that risk levels are still unacceptably high.

According to the American Enterprise Institute's (AEI) latest National Mortgage Risk Index, the share of home purchase loans at risk of going sour in the event of an economic downturn fell nearly half a percentage point last month to 11.44 percent.

AEI said the drop reflected declines for three of the four agencies tracked—Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA)—as well as a decline in the share of loans guaranteed by FHA and Rural Housing Services (RHS).

According to the group, the risk value of loans securitized in Fannie and Freddie's portfolios fell slightly to 5.8 percent, while the risk index for FHA slipped to 23.6—still nearly four times the maximum acceptable level of 6 percent, AEI says.

Meanwhile, the index for RHS hit a new series high, climbing to 19.75 percent.

The biggest factor underlying the current high-risk environment is the abnormally high amount of debt consumers are paying relative to their incomes, say analysts at AEI's International Center on Housing Risk.

According to the center, over the second quarter, 21.1 percent of loans tracked had debt-to-income (DTI) ratios higher than 43 percent, the highest allowable threshold for a loan to still fall under the qualified mortgage (QM) protections. The QM umbrella allows a temporary exemption for loans purchased by the GSEs or guaranteed by FHA.

As ever, AEI says the agencies are failing to compensate fully for the riskiness of high DTI loans.

At the state level, most areas continued to range between index values of 10 and 14 percent, with Hawaii and Washington, D.C., at the low end between 7–8 percent and Mississippi at the extreme high end with an index above 15 percent.

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