AEI’s National Mortgage Risk Index Explains NAR’s Propped Up Housing Market

The NAR said Thursday signed contracts to buy previously-owned homes rose 3.3 percent in July, far surpassing Wall Street’s expectation for a 0.5 percent increase. Sales have now risen in four of the last five months and regions saw reportedly healthy gains except for the Midwest, which saw a slight decline.

While the news was widely celebrated in the investor and political class, recent gains reported by the NRA and mediates reflect an increased return to risky lending practices, not a healthy housing market recovery.

In fact, the NRA report is actually cause for concern when understanding the subsidized forces propping up the housing market. AEI’s National Mortgage Risk Index, a measurement that combines National and State Mortgage Risk Indices, stood at 11.41% in July, down almost ¼ percentage point from June. Even though a decline is movement in the correct direction, subprime lending by the FHA and its issuers continues to grow.

Earlier this year, PPD reported on two policy statements made by Mel Watt, director of the Federal Housing Finance Agency (FHFA), and Shaun Donovan, secretary of HUD, which backed-off tight restrictions that required sound lending practices. The policies represent a return to a pre-crisis mindset and are repeating the mistakes of the subprime mortgage crisis.

As tracked by AEI, roughly 200,000 loans were added to the National Mortgage Risk Index in the month of July, and home purchase volume hits its highest level since November 2013. The latest data increase the total number of loans included in the index to 3.66 million. Meanwhile, the FHA refuses to hedge against the inherent risk associates with these high-DTI loans by tightening other underwriting criteria. Fannie and Freddie, who have largely offloaded the bulk of subprime lending to the FHA since the crisis, are tightening underwriting practices to a minimal extent.

The National Association of Realtors profits enormously from the government-run subprime racket, and the data reflect the fact they have wasted no time in cashing in. However, AEI’s risk indices provide the first-ever measure of how mortgage loans originated month by month would perform under severely stressed conditions, such as a lack of liquidity experienced during the 2007 collapse.

And it isn’t good.

This risks are fueling the recently reported home price volatility, but the impact with be felt particularly hard in lower income and minority areas. In fact, Hispanics were the hardest hit ethic group in 2007 – 2008, and experienced the greatest decrease in wealth out of any other home-owning group in America. AEI’s tracking shows that will be the repeated effect in the event of another future crash, as well.

Special note: Using newly incorporated data, the NMRI has been revised to rate all loans based on month of first loan payment rather than date of securitization. In addition, the composite, FHA and RHS series have been extended back to November 2012 from August 2013.