The Federal Housing Finance Administration (FHFA) on Friday released a revised discussion paper titled “A Quarter Century of Mortgage Risk,” with the aim of improving policymakers’ understanding of changes in mortgage risk over time and of the role it played in the 2008 recession, the FHFA said in a press release.
Using a comprehensive data set that contains aggregate results using over 200 million mortgage purchase and refinance loans from 1990 to 2019, the paper provides a summary measure of mortgage risk by estimating what l This is called a “stressed defect rate”.
The stressed default rate takes a loan made anytime between 1990 and 2019 and measures the risk of that loan as if it originated on the dawn of the 2008 financial crisis.
“The size and scope of the expanded data set in the document provides researchers and policymakers with more comprehensive and accurate historical information than ever before on mortgage risk,” noted the FHFA. “Based on the extensive data, the paper presents the main findings on mortgage risk in the years leading up to the 2008 financial crisis and in America today.”
The article – written and researched by William Larson of FHFA, Morris Davis of Rutgers University, Stephen Oliner of the American Enterprise Institute, and Benjamin Smith of the University of Pennsylvania – can be read in full at FHFA.gov. And he identifies three main conclusions, according to its authors:
The build-up of mortgage risk started earlier than previously thought.
“The new data shows that the build-up of mortgage risk in the 1990s was a precursor to market failure in 2008; previous research could not identify the fact that a refinancing boom from 2000 to 2003 was obscuring the accumulation of mortgage risk. “
Risk accumulated with borrowers for all credit scores.
“Prior to the 2008 financial crisis, mortgage risk accumulated across the spectrum of borrowers, not just those with low credit ratings as some have already claimed.
Lending standards eased before the Great Recession.
Mortgage rate spreads between non-risky and very risky loans narrowed for portfolio and private label mortgages in the mid-2000s, indicating an expansion in the supply of credit just before the Great Recession.”
The FHFA’s expanded data set, the press release explains, led to an additional key finding – that mortgage risk is accumulating again in America today.
“The sustained appreciation in house prices increases mortgage risk.”
The dataset and document is a working document, so all data, tables, figures and other results are subject to change, the FHFA noted. At this point, the authors note, “this causes researchers to question some long-held assumptions about the impetus for the 2008 financial crisis.”