AEI’s National Housing Market Risk Index Hits Series High In December

A monthly index tracking housing market risk hit a series high in the month of December, further blunting confidence in the sluggish housing sector.

The composite National Mortgage Risk Index (NMRI) for Agency purchase loans hit a series high of 11.84 percent in December, up 0.4 percent from the prior three-month average and 1.1 percent from a year earlier. Within the composite, the risk indices for the Federal Housing Administration (FHA) and Veterans Administration (VA) also hit series highs in December.

“With the NMRI hitting a series high, the risks posed by the government’s 85 percent share of the home purchase market are troubling, given that the combined capital of the agencies backing these loans is zero,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk.

The December index was based on more than 200,000 home purchase loans, which is an unusually large and thorough representation of all loans with a government guarantee. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since December 2012 moved above 5.29 million.

Other noteworthy results from the December NMRI include the following (via AEI):

• The QM regulation does not appear to be reducing the volume of high DTI loans: over the past 3 months, 23 percent of loans had a total DTI above 43 percent, which is up 1 percent from 2013:H2.

• The FHA is not compensating for the riskiness of its high DTI loans; Fannie and Freddie are compensating only to a limited extent.

• FHA’s NMRI stood at 24.33 percent in December, up 0.2 percentage point from the average for the prior three months, and 1.6 percentage points from a year earlier.  The current level implies that nearly one-quarter of FHA’s recently guaranteed home purchase loans would be projected to default under severely stressed conditions akin to the 2007-08 financial crisis.

• The softness in mortgage lending is not due to tight standards but to reduced affordability, loan put back risk, and slow income growth for many households.

The latest NMRI results come as the Commerce Department reported Wednesday that single-family housing starts rose by 7.2 percent to a seasonally adjusted annual pace of 728,000 units, the highest level in more than 6-1/2 years (March of 2008). While most media outlets will slant the report as the first good piece of data out of the sluggish housing market in months, the increased risk associated with any of the existing or new housing demand is truly cause for concern.

This is particularly true for American home-buyers proponents of high-risk government-sponsored programs profess to aim to help.

“The need to objectively track mortgage risk is even more important today given the ill-conceived launch of a price war between the government agencies Fannie Mae and FHA,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “This war will increase risk levels and fuel home price volatility, particularly in lower-income and minority areas.”