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32 MORTGAGE RISK JUMPS FROM INCREASED FHA LOAN VOLUME A look at April purchase lending suggests mortgage risk has turned up sharply as the Federal Housing Administration (FHA) takes more of the market. e American Enterprise Institute (AEI) put out a "flash release" of its National Mort- gage Risk Index (NMRI), a measure of the likelihood of purchase loan defaults under stressful economic conditions. e full index, which features a more complete look at data, was scheduled for release May 27. According to the group, the index climbed in April to 11.89, indicating nearly 12 percent of loans would be at risk of default in the event of another downturn. at figure is up from a reading of 11.5 percent in March and represents a series high for the index. AEI's Center on Housing Risk, which produces the monthly index, said the spike was "due to FHA, which had higher market share and increasing loan level risk." According to the researchers, FHA's home purchase volume in April came to an estimated 41,756, increasing 36 percent over March. At the same time, Fannie Mae and Freddie Mac together had home purchase volume of 101,050 in April, an increase of just 24 percent. Overall, AEI reported purchase volumes were up 27 percent month-to-month, "the result of the spring buying season ramping up." Breaking down risk across each segment, the April NMRI for FHA loans was 25.12 percent, up from 24.77 percent in March and a new high for that category. Meanwhile, the index for GSE loans fell slightly to 5.93 percent, dropping below the 6 percent maximum AEI said "is indicative of conditions conducive to a stable national market." AEI's preliminary index data came only days after the Mortgage Bankers Associa- tion's (MBA) look at credit availability, which reportedly tightened in April following nearly half a year of loosening. While a growing number of lenders have said they have followed tighter lending practices as a result of this year's qualified mortgage rules, AEI maintains the guidelines have actually had little effect, espe- cially as FHA and GSE loans remain exempt from rules establishing a 43 percent maximum debt-to-income threshold. REO INVENTORY RISING AGAIN e number of REO properties increased to 430,000 as of March, according to a blog post by CoreLogic's Sam Khater. March's figure reflects an increase of 15 percent from the low point of REO inventory in August 2013, when properties totaled 375,000. REO inventory rose across the nation in 46 states, with Idaho leading from a near doubling of its available inventory as REO. Mary- land came in second, which saw a 78 percent increase, followed by Nevada (70 percent), Oregon (47 percent), and North Dakota (42 percent). "As lenders began to accelerate the fore- closure process in early 2012, investor demand for REO properties began to rapidly increase. Investor demand more than offset the accelera- tion of foreclosure resolutions and led to a rapid decline in the number of REO properties," Khater said. He continued, "However, investor demand began to drop off last September, partly in response to the twin impact of rapid price increases and the rise in mortgage rates." Furthermore, the "robo-signing" scandal in the fall of 2010 caused servicers to push back foreclosure proceedings, increasing the timeline for a foreclosure to work its way through the entirety of the foreclosure process. After going public in September of that year, foreclosures immediately fell by one-third. e trend continued until 2011 and early 2012, when REO inventory numbers began rising again. "Not surprisingly, the rise in the number of REO inventory coincided with the national mortgage settlement, which was signed in February 2012 and provided more clarity and standards on foreclosure resolutions which led to the rise in REO properties," Khater said. Khater concludes that while the current lev- el is lower than during the peak of the financial crisis, the increase of REO properties signals a shift to a new phase of the housing market. Foreclosure auctions in the United States are at their lowest level since December 2006, according to RealtyTrac. KNOW THIS

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