November 28, 2014
The Urban Institute’s Housing Finance Policy Center has posted a research report, Measuring Mortgage Credit Availability Using Ex-Ante Probability of Default. This report tackles an important subject:
How to strike a balance between credit availability and risk to achieve a sustainable housing market is a much-debated topic today, but these discussions are not grounded in good measurements of credit availability and risk. We address this problem below with a new index that measures credit availability and risk simultaneously
The first section of the paper discusses the limitations of the existing measures. The second section describes our development of the new index, which distills borrower credit profiles, loan products and terms, and macro economic conditions into a measurement of the weighted average probability of default for mortgages originated at a given time. The third section illustrates the value of this measure by empirically exploring the varying risk appetites of the market as a whole, and of market segments, which directly aids evidence-based policymaking on how to open the tight credit box. The final section discusses the limitations of this new index. (1)
The report concludes,
Measuring a concept as complicated and varied as credit access is no easy task. Yet this is an important time to ensure that it is being measured accurately. As we seek to reform the housing finance system, Congress, the housing finance industry, advocacy groups, policymakers, and even the general public need to clearly understand how well the market is providing access to mortgage credit for borrowers. (18)
I say amen to that. There is a slim chance that housing finance reform may be back on the table in Washington, given the midterm election results. We need as much good data we can get in order to structure a system based on solid principles rather than on the views of special interests that typically dominate this debate.