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» VISIT US ONLINE @ DSNEWS.COM 21 SHIFT FROM BANK TO NONBANK LENDING CAUSING RISE IN DEFAULT RISK FOR AGENCY-BACKED LOANS A shift in market share from large banks to nonbanks accounted for a slight increase in the National Mortgage Risk Index (NMRI) for February as well as series-high levels for the risk indices for Fannie Mae/Freddie Mac, FHA, and VA loans within the composite index, according to data released in March by AEI's International Center on Housing Risk. e across-the-board increases in default risk can be attributed to the risk associated with nonbank lending, which is substantially higher than that of big bank loans, according to AEI. e composite NMRI was reported to be 11.93 percent in February, a slight increase of 0.1 percentage points from the prior three-month average and a jump of 0.8 percentage points year- over-year. e composite index just hit a series high of 11.94 percent in January. "e migration of mortgage lending away from large banks is an important story," said Stephen Oliner, co-director of AEI's International Center on Housing Risk. "Lightly regulated nonbank lenders have been more than willing to make risky loans, with taxpayers ultimately on the hook if defaults mount." e NMRI for FHA loans in February reached a series high of 24.48 percent, an increase of 0.2 percentage points from the prior three- month average, 0.7 percentage points higher than in January, and 1.6 percentage points higher than in February 2014. February's NMRI reading indicates recently guaranteed home purchase loans backed by FHA would be projected to default if they were to experience an economic shock similar to the 2007-2008 financial crisis. AEI estimated if FHA were to adopt VA's risk management practices, the composite index would fall to about 9 percent. February's AEI report found, just as the January report did, that the volume of high debt-to-income (DTI) ratio loans has not been reduced by QM regulation. e report also found FHA is not compensating for the riskiness of its high DTI ratio loans, and Fannie Mae and Freddie Mac were compensating only to a limited extent for the riskiness of their high DTI loans. e two GSEs are not compensating for the riskiness of high combined loan-to-value loans, according to AEI. "Our data confirm 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. "is is true for both low down payment and high debt-to-income lending." More than 204,000 home purchase loans with a government guarantee were evaluated for the February results, up from 186,000 in February 2014. e total number of loans risk-rated in the NMRI since November 2012 increased to nearly 5.7 million with February's numbers, according to AEI.

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