AEI Launches International Center on Housing Risk

Today the American Enterprise Institute (AEI) launched the International Center on Housing Risk (ICHR), an initiative that provides lenders, borrowers, and policy makers with an unprecedented set of tools for accurately measuring housing and mortgage risk. The ICHR, codirected by AEI’s Stephen Oliner and Edward Pinto, features contributions from a host of respected economists, researchers, and practitioners with decades of experience in housing finance and policy.

The recent financial crisis, which had devastating consequences for millions of American families, largely stemmed from a failure to understand the build-up of risk in housing and mortgage markets. In the coming year, ICHR will be releasing a series of indexes on mortgage risk, collateral risk, and capital adequacy designed to provide transparent measures of housing-related risks and the means to mitigate these risks and instill market discipline.

“Homeownership is an important part of the American dream for many people,” AEI president Arthur C. Brooks said in announcing the center. “The work of the new ICHR will help to ensure that this dream is helped, not hurt, by decisions made in Washington by providing homeowners, lenders, and policymakers the information they need about the risks associated with loans.”

“The 2007 housing collapse and subsequent financial crisis underscored the need for transparent and objective measures of mortgage risk, home-price risk, and the capital required to offset these risks,” said co-director Ed Pinto. “The Center seeks to fill this information gap. Had robust risk measures been available before 2007, they would have shed light on the opaque build-up in housing and mortgage market risk.”

Today, the ICHR released the monthly Mortgage Risk Index, the first of three signature products that introduce a new measure of transparency to housing finance by tracking risk in nearly real time.

The index is the first-ever measure of how loans would perform under economic stress. It uses the default experience of loans originated in 2007 as a benchmark to quantify how new mortgage loans would withstand a market collapse on par with the recent crisis. The index classifies loans as low-risk, medium-risk, and high-risk on a monthly basis for the national mortgage market and for the government-guaranteed components of the market. The national index, the NMRI, covers 85% of all new mortgages and 100% of government-issued mortgages.

“Stable housing markets require that a large majority of mortgage loans be unlikely to default even under stress,” said ICHR codirector Stephen Oliner. “The NMRI shows that less than half of all the recently originated mortgage loans and essentially none of the loans guaranteed by FHA meet this standard. This is an important finding because it overturns the conventional view that today’s loans are pristine.”

The ICHR engages nearly two dozen top domestic and international economists, researchers, and practitioners averaging over 30 years of experience each in housing policy. These experts will provide path-breaking empirical research and analysis of mortgage-market risks and their implications for borrowers, lenders, financial markets, and government policy.

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