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Nowhere was the devastation from the collapse of the mortgage market felt harder than in Nevada. The Silver State went from the lowest unemployment rate in the nation to the highest, for years the state had the highest foreclosure rate and nearly half of the homes in the state remain underwater, with the owner owing more on the mortgage than the home is worth. More than six years after the collapse began, the question remains, have we learned the lessons of the mortgage meltdown and will we prevent another catastrophe?
In an attempt to answer that question The American Enterprise Institute launched its International Center on Housing Risk (ICHR) earlier this week. The ICHR’s goal, as expressed by Edward J. Pinto, AEI Resident Fellow and Codirector of ICHR, is “to equip investors, lenders, borrowers and policymakers with the information they need to assess and mitigate risk in housing and mortgage markets.”
The residential mortgage market in the United States is the second-largest debt market in the world, behind only the U.S. Treasuries market, with $11 trillion in debt in single-family and multi-family mortgages, according to Pinto. He stated that since houses are highly-leveraged, declines in home prices can be very damaging, as witnessed by the last few years in which 8 million Americans lost their homes and 10 million no longer have any equity.
“Transparent and objective measures of mortgage risk, home-price risk and capital adequacy are needed to evaluate and manage this vast market,” he said. According to Pinto and the other codirector of the ICHR, Stephen D. Oliner, the quality of mortgage loans has improved since the worst of the housing bubble that preceded the bust but is still below what would historically be considered safe.
“They’re certainly a better quality than the worst loans we’ve seen just before the crisis but they’re not pristine,” Oliner said. Speaking of the government ventures that purchase mortgages and mortgage-backed securities, Oliner claimed, “The current originations across Fannie [Mae], Freddie [Mac] and FHA, more than half of those are not low risk. 47% are low risk.”
Pinto pointed out that, at 0.3%, the portion of FHA loans that are categorized as low risk, “literally rounds to zero.”
They also revealed that housing prices have increased at a much faster rate than rents, a condition that occurred before the mortgage meltdown. And the divergence this time has thus far been much more rapid, as detailed in a chart accompanying their presentation (see p. 7).
Pinto stated that current measures of mortgage risk, such as rising home prices and default/delinquency rates, are inadequate as these metrics may actually improve as risk increases. “Increasing risk is what dampens delinquency rates, is what helps propel house prices,” he said. “So it gives very much a false sense of security when you’re relying on indicators that are really the result of leverage, not measuring the leverage itself or the increasing leverage itself.”
AEI intends for ICHR to provide the information to objectively assess mortgage risk and prevent another meltdown.
Tags: American Enterprise Institute, Dodd-Frank, Edward J. Pinto, housing risk, mortgage meltdown, mortgage risk, recession, Stephen D. Oliner, unemployment
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