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Risk on Fannie Loans Rises as Freddie's Eases

National Mortgage Risk Index down in December

Jan. 23, 2014

By Mortgage Daily staff

The level of risk on residential loans originated last month moved lower. On just Fannie Mae loans, risk rose, while it was down on Freddie Mac loans. Both companies saw deterioration from a year earlier, though Fannie's was worse.

In December, the Composite National Mortgage Risk Index -- which was unveiled last month -- came in at 10.81 percent.

The index -- which reflects how mortgages will likely perform under economic stress -- is relatively low compared to roughly 19 percent in 2007, a time when credit standards were the loosest they had been in decades.

In 1990, a year when prudent underwriting standards predominated, the index was around 6 percent.

The NMRI -- which reflects purchase financing originations for Fannie Mae, Freddie Mac, the Federal Housing Administration and the Rural Housing Service -- is published by the AEI International Center On Housing Risk.

"In December, only 45.4 percent of the home purchase loans guaranteed by Fannie Mae, Freddie Mac, FHA, and RHS were rated as low risk, down from 46.4 percent in August," AEI said. "Such a low share is troublesome as stable housing markets depend on the preponderance of home loans being low risk."

The composite index declined 3 percent from November.

On just Fannie loans, the index was 6.13 percent in December, climbing 4 percent from the previous month.

Freddie's index declined 3 percent from November to 5.36 percent.

Compared to a year earlier, Fannie's index has ascended 20 percent, while it was up just 8 percent a Freddie.

"In the tug-of-war between the two agencies, Fannie Mae gained market share at the expense of Freddie Mac between 2012:Q4 and 2013:Q4, consistent with the greater increase in Fannie's risk exposure," the report said.

The risk on FHA-insured loans and Rural Housing Service mortgages originated in December was unchanged from a month earlier at 23.48 percent.

As AEI put it, "by far the riskiest loan portfolios are those guaranteed by FHA and RHS."

Edward Pinto, resident fellow and co-director of international center on housing risk at the American Enterprise Institute, explained in a telephone call that Freddie gained market share in December, while Fannie and FHA lost market share. The change in market share helped drive the month-over-month decline.

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