DS News - U.S. Bank

DS News July 2018

Issue link: http://dsnews.uberflip.com/i/1000391

Contents of this Issue

Navigation

Page 13 of 99

12 is month, DS News sat down with Dr. Lynn Fisher to discuss the housing trends impacting the market. Fisher focuses her research on examining affordable housing, home building, and mortgages. Before joining American Enterprise Institute (AEI) in April, Fisher was VP of Research and Economics and the Executive Director of the Research Institute for Housing America at the MBA, and on the faculty of Washington State University, the Massachusetts Institute of Technology (MIT), and the University of North Carolina. At MIT, she was director of the Housing Affordability Initiative in the Center for Real Estate. She has been published in several academic journals, including the American Economic Journal: Economic Policy, e Journal of Urban Economics, Real Estate Economics, and e Journal of Real Estate Finance and Economics. Fisher has three degrees from Pennsylvania State University: a doctorate in business administration with a concentration in real estate finance, a master's in business administration, and a bachelor's in international politics. Congratulations on your new role at AEI. One market indicator that AEI is known for is the National Mortgage Risk Index (NMRI)—can you share with our readers what the NMRI calculates and what it is currently forecasting for the market? NMRI calculates the average expected stressed default rate for newly originated agency loans based on debt-to-income ratios (DTIs), combined loan-to-value (LTV) ratio, borrower credit score, loan term, and purpose. e stressed default rate reflects the performance of loans originated in 2007 with the same characteristics. is measure shows that credit has been expanding over the past five years. Federal Housing Administration (FHA)-insured loans in particular—which are largely provided to first-time homebuyers and involve considerable risk layering—have increased in risk by 6 percentage points over this time in terms of averaged stressed default rate. e NMRI shows that if we have another stress event, like the one from 2007, more than 27 percent of FHA-insured loans would be expected to default. e riskiness of loans securitized by Fan- nie Mae has also risen notably in the months following the decision in mid-2017 to allow DTIs over 45 percent without compensating factors. We have seen a recent 1 percentage point jump in Fannie's NMRI driven by the fact that their share of newly originated loans with DTIs over 45 rose to more than 19 percent in January, up from just 6 percent of loans in September 2017. In mid-March, Fannie adjusted course and implemented an update to Desktop Underwriter to reduce risk- layering. In the coming months, we will be able to track how effective the policy adjust- ment was in moderating risk. Because inventories for sale are so low, any increase in the provision of leverage by the market—even if loans appear to be well-un- derwritten—serves to push home prices even higher, worsening the affordability problem. Are there actions the industry can take to alleviate the inventory constraint? Regarding low inventories of homes for sale, there is no easy fix, since potential home sellers are typically also prospective home buyers. If, as prospective buyers, households don't believe that they can buy what they want for a reasonable price, they won't put their home on the market in the first place, choking inventory. It will take time to add enough new homes to sufficiently expand the sales inventory and break out of this cycle. As a result, our data shows that total home sales are decelerating at the national level. e combination of new and existing home sales increased by 9 percent in 2015 and 10 percent in 2016 before slowing to a pace of just 5 percent growth in 2017. According to the Na- tional Association of Realtors, the inventory of existing homes for sale has fallen to historic lows, and many forecasters expect growth in ASK THE ECONOMIST HEAR DIRECTLY FROM TODAY'S LEADING MARKET EXPERTS. Dr. Lynn Fisher Resident Scholar and Co- Director of the Center on Housing Markets and Finance, American Enterprise Institute "Mortgage professionals need to remain vigilant that they are not relying solely on continued house price growth as the basis of their expectations about future loan performance."

Articles in this issue

view archives of DS News - U.S. Bank - DS News July 2018