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The Right Path for FHA?

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Brandon Farber

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The latest American Enterprises Institute Housing Market Indicators released its data on October 2018 with a focus on the National Mortgage Risk Index. The report, released on January 28, includes data on mortgage risk, house price appreciation, and home sales.

“FHA’s and the Bureau of Consumer Financial Protection’s pro-cyclical policies are continuing to drive home prices higher for entry-level buyers and are exposing buyers to an unsustainable home price boom,” noted Edward Pinto, Codirector of the AEI’s Center on Housing Markets and Finance. “As these policies since late-2012 have needlessly driven up low price tier homes by an additional $23,000, it is time both took counter-cyclical steps to protect homebuyers,” he added.

The report found that mortgage risk jumped in October with all indices setting new series’ highs for the month. The composite Purchase National Mortgage Risk Index (NMRI) recorded an increase of 0.4 percentage points from Oct. 2017. The Federal Housing Administration (FHA) index set a new series’ high at 28.2 percent. Refi NMRI  also set a new series’ high, primarily due to a higher Cash-Out Refi NMRI, it indicated.

According to AEI data, the higher NMRI indicates that agencies continue to increase leverage to maintain levels of mortgage activity and in furtherance of their “affordable housing” mission. The report noted that FHA continues to loosen and Fannie’s purchase risk index in Oct. 2018 at 1.4 percentage points outpaced that of Freddie’s. The report also pointed out that over the last 3 years, a shift towards higher DTIs has primarily driven the NMRI higher.

“Reports of the end of current housing boom are exaggerated,” said Tobias Peter, Senior Research Analyst at AEI’s Center on Housing Markets and Finance. “Inventories remain mostly tight, especially for entry-level homes, access to credit continues to be expanding, especially for first-time buyers, and mortgage rates have recently fallen below 4.5 percent again. All this points to a continuation of the boom at lower price points,” he added.

Shedding light on FHA lending, the report found that FHA’s credit box is wide and therefore credit for entry-level buyers is not tight. FHA continues to add high-risk borrowers with their risk index climbing through risk layering. Compared to 2017, the agency purchase volume declined this October. A decline of 3.9 percent was recorded in purchase volume by count compared to 2017—a rise in volume from 37 percent in October 2013. The report attributes the decline to the increase in mortgage rate to over 4.5 percent earlier in the year.

Per AEI Housing Market Indicators, maintaining purchase volume continues to be reliant on further agency credit easing— seen as needed to offset headwinds from gradually rising interest rates as a result of a slightly less accommodative monetary policy, and rapid home price increases.

Read the full report here.


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