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» VISIT US ONLINE @ DSNEWS.COM 11 Two scholars of the American Enterprise Institute (AEI)—Edward Pinto, who served as Fannie Mae's chief credit officer until the late 1980s, and Stephen Oliner, an economist who spent more than 25 years with the Federal Reserve—have developed a new Mortgage Risk Index to help mitigate the damage of housing's boom-and-bust cycles. As they explain it, the index measures the safety of mortgage lending in the United States by quantifying how new mortgage loans would perform under stress. Using the default experience of loans originated in 2007 as a benchmark, the index gauges how today's mortgages would fare if they were hit with a market collapse on par with the recent crisis. According to the index, mortgage risk remains high today compared to what its architects describe as the "sound lending practices in place in 1990." And even more troublesome, it indicates risk levels are rising. The two AEI scholars conclude that less than half of the home purchase loans extended in recent months can be considered low risk, despite claims that today's credit standards are too tight. Based on data through October 2013, newly originated mortgages had an overall index score of 10.9 percent; this figure represents the estimated cumulative default rate under stress circa 2007. To put things into context, vintage 1990 mortgages carry an index score of 6 percent, while mortgages from 2006- 2007 register a cumulative default rate of 21 percent. Looking at strictly Federal Housing Administration (FHA) loans, 2006-2007 vintages have an index reading of 29 percent, compared to 23.2 percent now. FHA mortgages from the 1936-1955 era, which is considered the "'Golden Age' of prudent FHA lending," according to the researchers, register a mere 3 percent on the risk index. In fact, all index results for purchase loans with a federal guarantee "are high relative to prudent standards and have edged up lately," Pinto and Oliner conclude. So why measure mortgage safety under economically stressful conditions? Pinto and Oliner say loans should be risk-rated under the stress of a substantial drop in home prices— not flat or rising prices. According to the pair, "Lessons learned from loan performance under extreme stress also can substantially reduce default rates and market losses during periods of moderate stress and help provide market stability." A look at facts you didn't know you couldn't live without Compiled by the DS News Staff TAKE A LOOK INSIDE THE NUMBERS D ATA B I T S PRESIDENT OF CARRINGTON PROPERTY SERVICES There were 680,000 loan modifications completed in the first 10 months of 2013, compared to 545,000 foreclosure sales, according to industry data from the HOPE NOW Alliance. Analysts with Barclays Capital expect to see 3.5 million new REOs come to market during the next three years. NEW MORTGAGE RISK INDEX EXPOSES MARKET VULNERABILITIES PAGE 37 INSIDE THE JOURNAL // MOVERS & SHAKERS // ON THE WEB // THE APP SPECTRUM Less than half of recent home purchase loans can be considered low risk. FIVE MINUTES WITH Kevin Cloyd 10 HOT U.S. HOUSING MARKETS TO WATCH IN 2014 BEST BUY CITIES: WHERE TO INVEST IN HOUSING IN 2014 Bethesda-Rockville-Frederick, MD 2.2% Charlotte, NC-SC 3.3% Denver, CO 2.6% Fort Worth, TX 3.5% Nashville, TN 2.8% Oklahoma City, OK 2.3% Raleigh, NC 2.1% Salt Lake City, UT 2.4% Seattle, WA 2.5% Tulsa, OK 2.0%t Housing Market Job Growth Fort Worth-Arlington, TX 25% Dallas-Plano-Irving, TX 29% Charlotte-Gastonia-Concord, NC-SC 24% Nashville-Davidson-Murfreesboro-Franklin, TN 23% Houston-Sugar Land-Baytown, TX 24% Atlanta-Sandy Springs-Marietta, GA 26% Oklahoma City, OK 16% Orlando-Kissimmee, FL 35% Las Vegas-Paradise, NV 58% Boise City-Nampa, ID 37% City 3-Year Growth Forecast

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