FHFA paper on mortgage risk from 1990-2019

The Federal Housing Finance Agency has released a revised staff working paper, “A Quarter Century of Mortgage Risk," to improve policymakers' understanding of how mortgage risk has evolved over time and the role it played in the 2008 recession. Using a comprehensive dataset that contains aggregated results using more than 200 million purchase-money and refinance mortgages from 1990 to 2019, the paper provides a summary measure of mortgage risk by estimating a “stressed default rate." The stressed default rate takes a loan made at any time from 1990-2019 and measures that loan's risk as though it originated at the dawn of the 2008 financial crisis. The paper identifies three key findings related to the Great Recession:

• Earlier mortgage risk accumulation: Mortgage risk started accumulating in the mid-1990s, sooner than previously thought. The new data shows that the buildup of mortgage risk in the nineties was a precursor to the market failing in 2008; previous research could not identify the fact that a refinance boom from 2000-2003 masked the mortgage risk accumulation.
• Risk accumulated with borrowers across all credit scores: Leading up to the 2008 financial crisis, mortgage risk accumulated across the full spectrum of borrowers, not just those with low credit scores as some have previously asserted.
• Relaxed lending standards: Mortgage rate spreads between not risky loans and very risky loans tightened for portfolio and private label securities mortgages in the mid-2000s indicating an expansion of credit supply right before the Great Recession.