Mortgage Risk Index – August 2015 Update

The composite National Mortgage Risk Index (NMRI) for Agency purchase loans stood at 12.09% in July, down 0.2 percentage point from the average for the prior three months, but up 0.6 percentage point from a year earlier. The monthly composite has increased year-over-year in every month since January 2014. Agency loan originations continued to migrate from large banks to nonbanks in July.  This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.   

“Historically low mortgage rates, an improving labor market, and loose credit standards especially for first time buyers, combined with a 35-month-long seller’s market for existing homes, continue to drive up home prices faster than income growth,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. Increasing leverage in a seller’s market is pushing up real home prices (now 12.5 percent above the trough reached in 2012:Q2) moving the goal post further away for many aspiring low- and middle-income homebuyers.

The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.  In July, the NMRI data included 264,000 such purchase loans, up 12% from a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 6.7 million.

Other notable takeaways from the July NMRI include the following:

  • The NMRI for first-time buyers hit 15.40%, up 0.9 percentage point from a year earlier, and well above the Repeat Buyer NMRI of 9.68%. 
  •  The Spring homebuying season has been very strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage. 
  • About 140,000 purchase loans for first-time buyers were added in July, up almost 16% from a year earlier, bringing the total number of first-time home buyer loans in the NMRI to 3.0 million (April 2013 – July 2015).
  • A non-stop seller’s market since September 2012 has been fueled by historically low mortgage rates and high, growing leverage. As a result, real home prices have been increasing since 2012:Q3, far outstripping income growth and crimping affordability.
  • Credit standards for first-time home buyers are not tight.
  • In July, 71% had down payments of 5% or less, 25% had DTIs greater than the QM limit of 43%, and the median FICO score was 709, a bit below the median for all individuals in the U.S. 
  • 20.7% of first-time buyers in July had subprime credit (a FICO score below 660), up from 18.9% in July 2014
  • The reduction in FHA’s mortgage insurance premium cut has boosted its market share to 29.1% in July from 23.7% in July 2014.
  • This increase has come at the expense of its most direct competitors: Fannie Mae (July market share at 33.5% down from 36.7% in July 2014) and the Rural Housing Service (July market share at 3.3% down from 5.1% in July 2014).
  • Riskier FHA loans have been used to purchase higher priced homes.
  • The collapse in large-bank market share continued in July, offset by nonbanks, which have a much higher MRI.

“FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk.  “Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes.”  

Please note, we will not be hosting a National Mortgage Risk Index briefing call this month. Our next call will take place on September 28, 2015 at 11AM ET. No RSVP is necessary at this time. Please contact Mr. Pinto at Edward.Pinto@AEI.org or Dr. Oliner at Stephen.Oliner@AEI.org with any questions.

AEI’s International Center on Housing Risk provides research, commentary, and new tools for measuring risk in housing and mortgage markets.  The recent financial crisis, and the resulting devastation for millions of families, largely stemmed from a failure to understand the build-up of risk in these markets. 

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Written by : Edward Pinto

Edward J. Pinto is a resident fellow and the director of the AEI Housing Center at the American Enterprise Institute (AEI). He is currently researching how to increase the entry-level housing supply for first-time buyers and renters who earn hourly wages, as well as examining the current house price boom that began in 2012. This continues his previous work on the role of federal housing policy in the 2008 mortgage and financial crisis.

Along with AEI Resident Scholar Stephen Oliner, Mr. Pinto created the Wealth Building Home Mortgage, a new approach to home finance designed to provide a more reliable and effective way of building wealth than is available under existing policies. This mortgage allows home buyers to maintain a buying power similar to a 30-year loan. It is aimed at a broad range of homebuyers, including low-income, minority, and first-time buyers.

Before joining AEI, Mr. Pinto was an executive vice president and chief credit officer for Fannie Mae until the late 1980s. Today, he is frequently interviewed on radio and television and often testifies before Congress. His writings have been published in trade publications and the popular press, including in the American Banker, The Hill, RealClearPolitics, and The Wall Street Journal. In addition, as the director of the AEI Housing Center, he oversees the monthly publication of the AEI Housing Market Indicators, which has replaced AEI’s monthly Housing Risk Watch and AEI’s FHA Watch.

Mr. Pinto has a JD from Indiana University Maurer School of Law and a BA from the University of Illinois at Urbana-Champaign.

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