Tag Archives: FNMA

“Recap & Release” – Trump Unveils Plan To End Govt Control Of Fannie, Freddie

After months (or years) of on-again, off-again headlines, President Trump is expected to sign a memo on an overhaul of Fannie Mae and Freddie Mac this afternoon, kick-starting a lengthy process that could lead to the mortgage giants being freed from federal control.

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The White House has been promising to release a plan for weeks, and its proposal would be the culmination of months of meetings between administration officials on what to do about Fannie and Freddie.

Bloomberg reports that while Treasury Secretary Steven Mnuchin has said it’s a priority to return the companies to the private market, such a dramatic shift probably won’t happen anytime soon.

In its memo, the White House sets out a broad set of recommendations for Treasury and HUD, such as increasing competition for Fannie and Freddie and protecting taxpayers from losses.

The memo itself has a worryingly familiar title (anyone else thinking 2007 housing bubble?):

President Donald J. Trump Is Reforming the Housing Finance System to Help Americans Who Want to Buy a Home

“We’re lifting up forgotten communities, creating exciting new opportunities, and helping every American find their path to the American Dream – the dream of a great job, a safe home, and a better life for their children.”

President Donald J. Trump

REFORMING THE HOUSING FINANCE SYSTEM: The United States housing finance system is in need of reform to help Americans who want to buy a home.

  • Today, the President Donald J. Trump is signing a Presidential memorandum initiating overdue reform of the housing finance system.
  • During the financial crisis, Fannie Mae and Freddie Mac suffered significant losses and were bailed out by the Federal Government with billions of taxpayer dollars.
    • Fannie Mae and Freddie Mac have been in conservatorship since September 2008.
  • In the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts.
    • Fannie Mae and Freddie Mac have grown in size and scope and face no competition from the private sector.
    • The Department of Housing and Urban Development’s (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems.

PROMOTING COMPETITION AND PROTECTING TAXPAYERS: The Trump Administration will work to promote competition in the housing finance market and protect taxpayer dollars.

  • The President is directing relevant agencies to develop a reform plan for the housing finance system. These reforms will aim to:
    • End the conservatorship of Fannie Mae and Freddie Mac and improve regulatory oversight over them.
    • Promote competition in the housing finance market and create a system that encourages sustainable homeownership and protects taxpayers against bailouts.
  • The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.
    • Treasury will prepare a reform plan for Fannie Mae and Freddie Mac.
    • HUD will prepare a reform plan for the housing finance agencies it oversees.
  • The Presidential memorandum calls for reform plans to be submitted to the President for approval as soon as practicable.
  • Critically, the Administration wants to work with Congress to achieve comprehensive reform that improves our housing finance system.

HELPING PEOPLE ACHIEVE THE AMERICAN DREAM: These reforms will help more Americans fulfill their goal of buying a home.

  • President Trump is working to improve Americans’ access to sustainable home mortgages.
  • The Presidential memorandum aims to preserve the 30-year fixed-rate mortgage.
  • The Administration is committed to enabling Americans to access Federal housing programs that help finance the purchase of their first home.
  • Sustainable homeownership is the benchmark of success for comprehensive reforms to Government housing programs.

*  *  *

Because what Americans need is more debt and more leverage at a time when home prices are at record highs and rolling over.

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Hedge funds that own Fannie and Freddie shares have long called on policy makers to let the companies build up their capital buffers and then be released from government control.

It’s unclear whether the White House would be willing to take such a significant step without first letting lawmakers take another stab at overhauling the companies.

But not everyone is excited about the recapitalizing Fannie Mae and Freddie Mac. Edward DeMarco, president of the Housing Policy Council, warned that releasing them from conservatorship would do nothing to fix the mortgage giants’ charters or alter their implied government guarantee:

“I’m not sure what is good about recap and release,” DeMarco, a former acting director of the Federal Housing Finance Agency, said in a phone interview.

DeMarco also noted that the government stepped in to save the companies in 2008, and they continue to operate with virtually no capital. On Tuesday, DeMarco told the Senate, during the first of two hearings on the housing finance system that “recap and release should not even be on the table.”

But shareholders in the firms were excitedly buying… once again.

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Deciding the fate of Fannie and Freddie, which stand behind about $5 trillion of home loans, remains the biggest outstanding issue from the 2008 financial crisis.

Source: ZeroHedge

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GSE Loan Purchases Continue To Trend Down

Fannie Mae and Freddie Mac are bankrolling significantly fewer loans this year, reflecting the general slowdown in the residential U.S. mortgage market.

In the nine months through the third quarter, the government-sponsored enterprises (GSEs) purchased a combined 2.47 million home loans, down 9 percent for the same nine months in 2017, the companies reported last week in quarterly reports.

The GSEs bankroll around 45 percent of all residential mortgages, according to the Urban Institute, by purchasing loans from lenders, wrapping them with a government guarantee and securitizing most of them for sale in the secondary market.

fanncountsq3The combined balance of these loans through the third quarter was $577 billion, down 7 percent from the 2017 level for the same nine months.

freddvolq3GSE funding activity has dropped for the second consecutive year.

freddcountq3The 2018 year-to-date counts and volume balances were down 16 percent and 15 percent, respectively, compared to same nine months in 2016.

During a conference call last week, Fannie Mae Chief Financial Officer Celeste Brown alluded to tough conditions for lenders. 

“At a high level, what I see is that our customers are facing a lot of headwinds in the market,” she said. “Rates are up, volumes are down, and margins are tight, so lender profitability is challenged. New housing supply is up but not all the supply has been created where it’s needed. While we do see income growth nationally, in many markets home-price growth has outstripped income growth so affordability for home buyers remains a challenge,” Brown said. 

The numbers have waned as a result of the big drop in refinancing activity. The combined GSE refinance counts totaled 909,000, down 26 percent from the 1.23 million refinance loans acquired by the GSEs through the first nine months of 2017. The GSE reports indicate that cash-out refinancing levels have remained fairly stable, whereas rate-reduction and term refinances are falling steeply. 

Meanwhile, the home-purchase market hasn’t grown at anywhere near the pace that refinance activity has been falling.The combined GSE home-purchase loan counts through the third quarter totaled 1.56 million, up 5 percent over the 2017 level.

U.S. home sales are expected to be flat this year or even decline marginally due to rising prices; a lack of affordable, entry-level homes for sale; and rising rates.

“Our expectations for housing have become more pessimistic,” Fannie Mae Chief Economist Doug Duncan said in October. “Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time home buyers, remains atop the list of challenges facing the housing market.”

Fannie Mae’s most recent forecast calls for the origination volume for the entire market to fall 10.5 percent year over year in 2018, to $1.63 trillion. Refinance volume is predicted to decline by 30 percent over the 2017 level to $454 billion. Purchase volume in 2018 will remain essentially flat with the 2017 level at $1.18 trillion, Fannie forecasts. 

Source: by Victor Whitman | Scotsman Guide

Fannie Mae Says Economy Will Slow in 2nd Half Of 2017

WASHINGTON, DC – Expectations for 2017 economic growth remain at 2.0 percent amid a projected second half slowdown, according to the Fannie Mae Economic & Strategic Research (ESR) Group’s July 2017 Economic and Housing Outlook. With the expansion having entered its ninth year, incoming data point to a second quarter economic growth rebound to 2.7 percent annualized, up from 1.4 percent in the first quarter. However, the full percentage point rise in the saving rate since December signals increased caution among consumers, despite elevated consumer confidence. Decelerating corporate profit growth, commonly seen in the late stages of an expansion, presents a challenge to business investment that is compounded by tax policy uncertainty. In addition, residential investment will likely contribute less to second half growth due to lackluster homebuilding activity and tight for-sale inventory that is restraining home sales. Consequently, se cond half growth is expected to slow slightly to 1.9 percent. Moderate growth is expected to continue in 2018, with potential changes to fiscal and monetary policy posing both upside and downside risks to the forecast.

“While second quarter growth is poised to rebound, we expect growth to moderate through the remainder of 2017. Consumer spending, traditionally the largest contributor to economic growth, is sluggish and is lagging positive consumer sentiment and solid hiring,” said Fannie Mae Chief Economist Doug Duncan. “While labor market slack continues to diminish, wage growth is not accelerating and inflation has moved further below the Fed’s target. These conditions support our call that the Fed will continue gradual monetary policy normalization, announce its balance sheet tapering policy in September, and wait until December for additional data, especially on inflation, before raising the fed funds rate for the third time this year.”

“Construction activity has lost some steam following the first quarter’s weather-driven boost,” Duncan continued. “Meanwhile, very lean inventory continues to act as a boon for home prices and a bane for affordability, particularly among potential first-time homeowners. According to our second quarter Mortgage Lender Sentiment Survey, lenders expect to ease credit standards further. However, we continue to project that the pace of growth in total home sales will slow to 3.3 percent this year, as we believe rapid home price gains amid scarce supply will remain a hurdle for potential homebuyers despite improvements in credit access.”

Visit the Economic & Strategic Research site at www.fanniemae.com to read the full July 2017 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.

By Matthew Classick | FNMA

Final Obama Budget Banks On Siphoning Millions Off Fannie Mae And Freddie Mac For Years to Come

It is audacious that President Obama’s fiscal 2017 budget proposal released Tuesday counts income from Fannie Mae and Freddie Mac as just another revenue stream – not only for the coming year but for the next ten years.

The Administration has long shown it has a hearty appetite for the mortgage giants’ revenues. The two companies have already sent a combined $241.3 billion to the government since being placed in conservatorship 2008 – over $50 billion more than the $187.5 billion in taxpayer funds they received at that time. Should the “temporary” conservatorship and Third Amendment Sweep remain in force for at least another ten years the White House estimates the GSEs will send another $151.5 billion to the U.S. Treasury.  That could mean these privately-owned mortgage giants will have sent nearly an astounding $400 billion to Treasury while needed reforms were put on hold.

The revenue projections in the budget proposal justify assumptions about why the Administration has had much less of an appetite for recommending ways to reform and recapitalize Fannie and Freddie and ensure they could provide liquidity and stability in the mortgage market for years to come.  Why sell a cash cow? The Administration effectively yielded its statutory authority – and obligation – to end the conservatorship with the enactment of a massive spending bill late last year that included provisions of the so-called “Jumpstart GSE Reform.” Despite the bill’s name, it put Congress in the driver’s seat and all but guaranteed no additional action will be taken to end the conservatorship this year or perhaps not until well in 2017.

The proposed fiscal 2017 budget, like all blueprints before it, makes no room for the inevitable recession and market correction. Should a downturn occur in the next year or so, taxpayers will be obligated to provide additional bailout funding because Fannie Mae and Freddie Mac have been prohibited from building up adequate capital levels.

In a nod to the persistent problem of access to affordable housing, the budget proposal estimates Fannie and Freddie will provide another $136 million to the Affordable Housing Trust Fund in 2017. This money is provided to states to finance affordable housing options for the poor. The Administration reports this would be added to the $170 million set to be distributed this year. But here’s the catch: those funds derive from a small fee on loans Fannie Mae and Freddie Mac help finance but only as so long as they don’t require another infusion of public money.

In essence, President Obama’s final budget proposal counts money to which it was never entitled; it flaunts a disregard for the Housing and Economic Recovery Act’s requirement that Fannie Mae and Freddie Mac be made sound and solvent; and it takes a cavalier stance to the fact that under capitalized GSEs could have negative consequences for taxpayers and working Americans striving for home ownership. After eight years, the Administration’s parting message is that needed reforms in housing finance policy will simply have to wait for another president and another Congress.   There is not urgency of now, just the audacity of nope.

Source: ValueWalk

ACKMAN: The US government is perpetrating ‘the most illegal act of scale’ with Fannie and Freddie

Bill Ackman

Bill Ackman, the founder of Pershing Square Capital

by Julia La Roche.

Hedge fund titan Bill Ackman, the founder of $19 billion Pershing Square Capital Management, slammed the US government on Tuesday night for keeping all of the profits from mortgage guarantors Fannie Mae and Freddie Mac.

Ackman called it “the most illegal act of scale” he has ever seen the US government do.

Ackman spoke on Tuesday evening during a panel at Columbia University for the launch of Bethany McLean’s new book “Shaky Ground.” McLean and former Fannie Mae CEO Frank Raines were also panelists. Ackman, however, did most of the talking.

During the financial crisis, Fannie and Freddie needed massive bailouts and were taken over by the government. It’s been seven years since the financial crisis and the companies are still in a state of conservatorship. Today, the government-sponsored enterprises (GSEs) make billions in profits, all of which goes directly to the Treasury.

Ackman, the largest shareholder of Fannie and Freddie, and other investors are suing the US government for taking property for public use without just compensation.

“And there is no way they will not be allowed to stand, from a legal point of view. And the reason for that is if the US government can step in and take 100% of profits of a corporation forever, then we are in a Stalinist state and no private property is safe — and take your money out of every financial institution, put it into gold or bitcoin and just get the hell out because we’re done, maybe the clothes on your back, but other than that nothing is safe,” he said.

A stands outside Fannie Mae headquarters in Washington February 21, 2014. REUTERS/Kevin Lamarque

            A man stands outside Fannie Mae in Washington

In Ackman’s view, Fannie and Freddie are vital to the US economy. Right now, he said, the biggest threat to the US middle class is rising rental rates.

“If you don’t own a home, and you’re a member of the middle class, you have a problem,” he said. “This is the biggest threat to the middle class livelihood is that your cost of living, the roof over your head is not fixed, it’s floating.”

Ackman said that Fannie and Freddie were set up to make middle class housing more accessible. Together, they have enabled widespread availability and affordability with the 30-year, fixed-rate, pre-payable mortgage—a system that’s been in place for 45 years.

Ackman said he’s optimistic about the future of Fannie and Freddie. He has said before that with the right reforms they could be worth a lot more. He has given the GSEs a price target ranging between $23 and $47, which is well above the current $2 range.

Watch the full panel below:

Read more in Business Insider

America’s Home Buyers Being Targeted as Washington’s ‘Pay-For’ Piggy Bank

Would-be home buyers recently averted a major price hike by the narrowest of margins. No, this potential hike had little to do with the wholesale cost of building materials, the cost of borrowing capital, a scarcity of inventory, or the transaction costs of builders, Realtors or lenders. Rather, the latest proposed tax on new homeowners was designed to cover the cost of maintaining our nation’s bridges and roads.

Wait a second — what, if anything, does highway spending have to do with the cost of a residential mortgage? If you guessed “absolutely nothing at all” you’d be correct. Unless, of course, you happen to be a member of the 114th Congress. In that case, America’s newest class of would-be homeowners represents something similar to years past when homeowners were taxed to cover things like the payroll tax reduction extension.

In the Washington of today — similar to past occasions, the American homeowner is all-too-often referred to as a “pay for.”

In this case, various members of Congress sought an offset for a proposed $47 billion federal highway spending bill.

As crazy as it sounds, the latest unsuccessful home ownership “pay-for” proposal isn’t the first time such a plan has been considered. In fact, if you bought a home after December 2011 with a mortgage purchased by Fannie Mae and Freddie Mac, you’re already paying for much more than the cost of a place to live.

The Temporary Payroll Tax Cut Continuation Act of 2011 — H.R. 3765 of the 112th Congress charged new homeowners an additional 10 basis points in guarantee fee costs over the life of a 30-year mortgage. The proceeds were intended to help cover an increase in a two-month extension of the payroll tax credit and also unemployment compensation payments to long-term unemployed workers for roughly two months, from mid-December 2011 until February 29, 2012.

The law states that loan guarantee fees at Fannie and Freddie will rise “by not less than an average increase of 10 basis points for each origination year or book year above the average fees imposed in 2011 for such guarantees.” This means that an estimated $36 billion in additional fees collected over 10 years will be used to offset $33 billion in up-front costs tallied by a mere eight weeks of payroll tax deductions and unemployment insurance.

Kap / Spain, Cagle Cartoons

Of course none of this has anything to do with the financial health of Fannie Mae and Freddie Mac or the creditworthiness of the individual borrower, but it directly impacts the cost of a new home purchase or refinance. It happened because there’s value in home ownership — value that some congressional leaders think can be taxed for almost anything.

The recent flurry of loan guarantee fee increases at Fannie Mae and Freddie Mac (three times in just over four years) has nothing to do with the risk expected within the overall portfolios of loan business purchased by either of the two mortgage guarantor giants Fannie Mae or Freddie Mac during this time frame. The overall creditworthiness of loan portfolios purchased by both Fannie Mae and Freddie Mac has risen significantly over the last six years. In fact, both GSEs carry loan portfolios with aggregate average FICO scores well in excess of the average American. Yet, loan guarantee fees at Fannie Mae and Freddie Mac have skyrocketed by more than 160 percent over the exact same time period.

One reason for the recent rise in “g-fee” expenses has to do with congressional spending packages brokered by both parties for all sorts of concerns. Add to this equation the simple fact that the GSEs themselves are essentially a government-controlled duopoly, and one can understand exactly how the last six years of guarantee fee hikes came to pass.

Fannie Mae and Freddie Mac both currently operate under federal conservatorship administered by the Federal Housing Finance Agency (FHFA). Now in its 84th consecutive month, this “temporary” conservatorship has continued for almost seven years with no proposed plan for a future model. Freddie Mac declared over $8 billion in profits in 2014 alone. Fannie Mae recently declared profits of $4.6 billion in the brief April-through-June time period of 2Q 2015 by itself. Meanwhile, home buyers, cities, communities and the lenders and real estate agents that support the home ownership market have continued to struggle to recover from the housing financial crisis.

Keep in mind, the true cost of capital for Fannie Mae and Freddie Mac alike, is essentially zero — they are “conservatees” of the federal government. The notion of passing the cost of capital to the consumer, much like a private sector bank would, simply does not apply in the same sense.

The damage that a deliberate yet unwarranted campaign of GSE guarantee fee has done to American home ownership is clear. With wrongheaded policies such as these, it is easy to understand how the U.S. home ownership rate has dropped to the lowest level in almost 50 years.

It bears mentioning that not everyone on Capitol Hill is interested in using your nest egg as their fiscal piggy bank. Various members of Congress from both political parties have stood in unison to say “enough.” Republican Senator Bob Corker of Tennessee recently joined Democratic Senator Mark Warner of Virginia in authoring an open letter to Senate Majority Leader Mitch McConnell (R) and Senate Minority Leader Harry Reid (D) in opposition to the “homes for highways” pay-for gambit.

“Each time guarantee fees are extended, increased or diverted for unrelated spending, homeowners are charged more for their mortgages and taxpayers are exposed to additional risk,” said Senators Corker and Warner. Exactly.

It took a (rare) bipartisan effort led by Senators Corker and Warner to publicly shame Congress into upholding the same measure prohibiting such g-fee “pay-for” deals that they themselves passed only months ago.

It has happened before, and it will undoubtedly happen again. It’s just too easy, and it makes almost everyone happy. Everyone except the unsuspecting homeowner, that is. Various constituent groups get whatever spending item they’re after today, fiscal watchdogs get the satisfaction of knowing that at least someone, somewhere, is on the hook to pay the added cost. The problem is, if you’re in the market to buy a home in the foreseeable future or planning to refinance your existing home loan, that “someone” will most likely be you.

Prospective new homeowners have all sorts of pressing concerns to consider. Strapping the cost of a federal highway spending bill onto their backs by way of artificially inflated loan guarantee fees paid over the life of a 30-year mortgage shouldn’t be one of them.

Read more by Garrick T. Davis in The Huffington Post

Courts Confirm Fannie and Freddie Are Sovereign Credits: Report

by Jacob Passy

Recent court decisions against Fannie Mae and Freddie Mac shareholders have put to rest the notion that the two mortgage giants exist as anything but instrumentalities of the U.S. government, according to a report released Thursday by Kroll Bond Rating Agency.

Private equity investor groups recently have raised lawsuits against the Federal Housing Finance Agency, in an effort to regain control of the two entities. The failure of these legal actions points to the de facto nature of the two entities as sovereign credits, given their complete backing by the U.S. government.

The KBRA report also suggests that Fannie Mae and Freddie Mac have morphed into insurance agents rather than insurance companies, since they cannot produce the capital to bear the risk of their guarantees that the FHFA prices to begin with.

Still, the two bodies’ investors take issue with the 3rd Preferred Stock Purchase Agreement that directs all of Fannie Mae and Freddie Mac’s profits to the government, the KBRA report said.

But these investors’ suits have been unsuccessful because, in judges’ eyes, the legislation passed by Congress that saved Fannie Mae and Freddie Mac from the brink gives the U.S. Treasury and FHFA the right to manage the two companies as they see fit. But KBRA finds instead that “the 3rd PSPA simply compensates the Treasury for the capital injection made in 2008 and, more important, the open-ended support of the U.S. taxpayer.”

The report goes on to argue that these investors misinterpret the support the U.S. government lent to the two mortgage entities. Prior to the capital injection, Fannie Mae and Freddie Mac had negative net worth, meaning that Treasury’s aid only brought them to zero.

But, as the report reads, all of the profits the two make now represent therefore the return on the government’s investment, so to recapitalize Fannie Mae and Freddie Mac would essentially involve taxpayer money, which the report found “galling.”

“They are not talking about injecting any of their own cash into the companies,” KBRA writes. “If you accept the idea that the taxpayers are due a return on both the implicit and explicit capital advanced to keep the mortgage market operating, there are no earnings to be retained in the GSEs.”

The report did contend that while this may not spell out good news for the two mortgage agencies’ equity investors, it should end some of the uncertainty bond investors have faced by confirming their standing in the eyes of government.


Fannie Mae Ended 2014 on a Sour Note

by Phil Hall

Fannie Mae hit more than a few financial potholes during 2014, closing the year with significantly lower net income and comprehensive income and a stated concern that things may not get better during 2015.

The government-sponsored enterprise reported annual net income of $14.2 billion and annual comprehensive income of $14.7 billion in 2014, far below 2013’s levels of $84 billion in net income and $84.8 billion in comprehensive income.

The fourth quarter of 2014 was especially acute: Fannie Mae’s net income of $1.3 billion and comprehensive income of $1.3 billion for this period, a steep drop from the net income of $3.9 billion and comprehensive income of $4.0 billion for the third quarter. Fourth quarter net revenues were $5.5 billion, down from $6 billion for the third quarter, while fee and other income was $323 million for the fourth quarter, compared with $826 million for the third quarter. Net fair value losses were $2.5 billion in the fourth quarter, up substantially from $207 million in the third quarter.

Fannie Mae explained that its fourth quarter results were “driven by net interest income, partially offset by fair value losses on risk management derivatives due to declines in longer-term interest rates in the quarter.” Nonetheless, Fannie Mae reported a positive net worth of $3.7 billion as of Dec. 31, 2014, which resulted in a dividend obligation to the U.S. Department of the Treasury of $1.9 billion that will be paid next month.

In announcing its 2014 results, Fannie Mae offered a blunt prediction that this year will see continued disappointments.

“[Fannie Mae] expects its earnings in future years will be substantially lower than its earnings for 2014, due primarily to the company’s expectation of substantially lower income from resolution agreements, continued declines in net interest income from its retained mortgage portfolio assets, and lower credit related income,” said Fannie Mae in a press statement. “In addition, certain factors, such as changes in interest rates or home prices, could result in significant volatility in the company’s financial results from quarter to quarter or year to year. Fannie Mae’s future financial results also will be affected by a number of other factors, including: the company’s guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition, and quality of its retained mortgage portfolio and guaranty book of business; and economic and housing market conditions.”


 Default Risk Index For Agency Purchase Loans Hits Series High

by Brian Honea

Agency Loan Mortgage Default Risk

The default risk for mortgage loan originations rose in January, marking the fifth straight month-over-month increase, according to the composite National Mortgage Risk Index (NMRI) released by AEI’s International Center on Housing Risk.

In January, the NMRI for Agency purchase loans increased to a series high of 11.94 percent. That number represented an increase of 0.4 percentage points from the October through December average and a jump of 0.8 percentage points from January 2014.

“With the NMRI 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 AEI’s International Center on Housing Risk.

Default risk indices for Fannie Mae, FHA, and VA loans hit series highs within the composite, according to AEI. The firm attributes to the consistent monthly increases in risk indices to a substantial shift in market share from large banks to non-bank accounts, since the default risk tends to be greater on loans originated by non-bank lenders.

AEI’s study for January revealed that the volume of high debt-to-income (DTI) loans has not been reduced by the QM regulation. About 24 percent of loans over the past three months had a total DTI above 43 percent, compared to 22 percent for the same period a year earlier. The study also found that Fannie Mae and Freddie Mac were compensating to a limited extent for the riskiness of their high DTI loans.

Further, the NMRI for FHA loans in January experienced a year-over-year increase of 1.5 percentage points up to 24.41 percent – meaning that nearly one quarter of all recently guaranteed home purchase loans backed by FHA would be projected to default if they were to experience an economic shock similar to 2007-08. AEI estimates that if FHA were to adopt VA’s risk management practices, the composite index would fall to about 9 percent.

“Policy makers need to be mindful of the upward risk trends that are occurring with respect to both first-time and repeat buyers,” said Edward Pinto, co-director of AEI’s International Center on Housing Risk. “Recent policy moves by the FHA and FHFA will likely exacerbate this trend.”

AEI said the cause of the softness in mortgage lending is not tight lending standards, but rather reduced affordability, loan put back risk, and slow income growth among households.

More than 180,o00 home purchase loans were evaluated for the January results, bringing the total number of loans rated in the NMRI since December 2012 to nearly 5.5 million, according to AEI.