National Mortgage Risk Index Hits New High, Gov’t Market Share 85%

The riskiness of mortgage loan originations in the U.S. housing market rose in January, marking the fifth straight month of risk increases. AEI’s composite National Mortgage Risk Index (NMRI) for Agency purchase loans hit a new series high of 11.94 percent in January, up 0.4 percent from the prior 3-month average and 0.8 percent year-over-year.

“With the NMRI once again hitting a series high, the risks posed by the government’s 85% percent share of the home purchase market continue to rise,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk.

The composites subindexes gauging risk for Fannie Mae, the Federal Housing Administration (FHA), and the Veterans Administration (VA) all hit new series highs in January, as well. Because non-bank lending is substantially riskier than the large bank business it replaces, the shift in market share from large banks to accounts at non-banks is particularly concerning, and represents much of the upward trend.

The NMRI results for January are based on more than 180,000 home purchase loans, which represents nearly the entire universe of such loans with a government guarantee. Including these loans, the total number that have been risk rated in the NMRI since December 2012 has now topped 5.49 million.

“Policy makers need to be mindful of the upward risk trends that are occurring with respect to both first-time and repeat buyers,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “Recent policy moves by the FHA and FHFA will likely exacerbate this trend.”

Highlights From December NMRI via AEI:

• The QM regulation has not reduced the volume of high DTI loans: over the past 3 months, 24% of loans had a total DTI above 43%, up two percentage points from the share in 2013:H2.
• 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 24.41% in January, up 0.2 percentage point from the average for the prior three months, and 1.5 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.