October 13, 2015, HCAI Update


Default Risk Taken by the Mortgage Market

The Housing Finance Policy Center’s latest credit availability index (HCAI) shows that mortgage credit availability dipped slightly to 5.3 in the second quarter of 2015, down from 5.5 in the previous quarter. Availability still remains above the low of 4.6 found in the third quarter of 2013.

The HCAI measures the percentage of purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.

Since September 2013, credit availability in the government-sponsored enterprises (GSE) channel, which comprises Fannie Mae and Freddie Mac, has eased 17 percent. Credit availability in the government channel, which comprises the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture Rural Development program, has eased 7 percent. Federal efforts to expand the credit box, particularly those of the Federal Housing Finance Agency, which oversees the GSEs, are having an impact. Credit availability in the portfolio and private-label securities channel continues to be tight, which stays well below 3 percent since 2013. 

Significant space still remains to safely expand the credit box. If the current default risk were doubled across all channels, it would still be well within the pre-crisis standard of 12.5 percent in 2001–03 for the whole mortgage market.

HCAI by Channels

GSE Loans 

The GSE market has expanded the credit box for borrowers more than the FVR government channel has in recent months. The downward trend of credit availability in the GSE channel was reversed in the second quarter of 2011. From the third quarter of 2013 to the second quarter of 2015, the total risk taken by the GSE channel increased 17 percent, from 1.8 percent to 2.1 percent. 

Default Risk Taken by the Government-Sponsored Enterprises Channel

Government Loans

The total default risk the government loan channel is willing to take bottomed out at 9.6 percent in the third quarter of 2013. It climbed to 10.5 percent in the fourth quarter of 2014 before dropping slightly to 10.1 percent in the first quarter of 2015 and 10 percent in the second quarter of 2015. Even the most recent credit risk for the government channel, however, is just under half the pre-bubble level.

Default Risk Taken by the Government Channel

Portfolio and Private-Label Securities Loans

The portfolio and private-label securities, or PP, channel took much higher product risk than the FVR and GSE channels did during the bubble. After the crisis, the channel’s product and borrower risks both dropped sharply. They have stabilized since 2013; product risk has fluctuated around 0.6 percent and borrower risk around 2 percent between 2013 and 2014. However, the PP channel took even less product risk (only 0.1 percent) in the first two quarters of 2015.