Default Risk Rise as Nonbank Lending Increase










Photo credit: Woodleywonderworks

The default services industry may see an increase in activity as a result of bank lending changes. AEI’s International Center on Housing Risk recently released data showing that big banks are increasingly writing less mortgages. The shift in market share from large banks to nonbanks is responsible for a slight uptick in the National Mortgage Risk Index (NMRI) for February in addition to series-high levels for Fannie Mae/ Freddie Mac, VA and FHA loan risk indices within the composite index.

Across-the-board increases in default risk is correlated with the nonbank lending risk, which is much higher than that of large bank mortgage loans, according to AEI. The composite NRMI was 11.93 percent in February, which increased 0.1 percentage points from the prior three-month average and up 0.8 percent year over year.

Stephen Oliner, Co-Director of AEI’s International Center on Housing Risk said, “The migration of mortgage lending away from large banks is an important story. Lightly regulated nonbank lenders have been more than willing to make risky loans, with taxpayers ultimately on the hook if defaults mount.”

The NMRI for FHA loans in February increased 0.2 percentage points over the prior three-month average, up to a series high of 24.48 percent. The February reading shows that recent FHA-backed loans were projected to default if the market were to experience a shock similar to the 2007-08 financial crisis. If FHA were to adopt VA’s risk management practices, the composite index would drop down to around 9 percent.

QM regulation did not reduce the amount of high debt-to-income ratio loans as reported by AEI’s in February. The report also uncovered that FHA is not compensating for its high DTI ration loan risk, unlike Fannie Mae and Freddie Mac, which compensated to a limited extent. Both GSEs are not compensating for high combined loan-to-value loan risk.

“Our data confirms the push by regulators to loosen lending standards is heavily reliant on layering of, not compensating for, risks,” said Edward Pinto, Co-Director of AEI’s International Center on Housing Risk.  “This is true for both low down payment and high debt-to-income lending.”

There were more than 204,000 government-guaranteed mortgage loans evaluated in the February results, which is up from the 186,000 analyzed in February 2014.



DSNews. Shift from Bank to Nonbank Lending Causing Rise in Default Risk for Agency-Backed Loans



Back To PEMCO News
Back to Top