Bubble-Bursting Report: Mortgage Risk Index Hits Series High in April

The National Mortgage Risk Index (NMRI) for Agency purchase loans came in at a series high 12.08 percent in April, as the market share of high-risk loans outnumbered the share of low-risk loans for the first time since tracking began.

The NMRI gained 0.2 percent from the average for the prior three months and 0.7 percent on a year-over-year basis. The share of high-risk Federal Housing Administration (FHA) loans and the subindex for VA loans also reached series highs.

“With leverage unconstrained by the Qualified Mortgage regulation, increasing competition between Fannie and FHA, and eventually Freddie, will slowly introduce destabilizing risk nationally,” said Edward Pinto, the former chief credit officer for Fannie Mae and co-director of AEI’s International Center on Housing Risk. “The goal of the NMRI is to quantify and pinpoint these leverage trends in real time.”

In April, Agency loan originations continued on their disturbing trend, migrating from large banks to non-banks. According to the survey’s directors, this shift in market share represents much of the upward trend in the composite NMRI. Nonbank lending is substantially riskier than large bank lending it replaces.

“One hears all the time that first-time buyers have limited access to mortgage debt. But this isn’t true,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk and senior fellow at UCLA’s Ziman Center for Real Estate. “Many first-time buyers with low FICO scores and little money down are buying homes every month.”

The NMRI is perhaps the most thorough housing market survey in the industry, regarding its sample size and low propensity for error. The results are based on nearly the universe of home purchase loans with a government guarantee. In April, for instance, the NMRI data included 158,000 such purchase loans, up from 138,000 loans 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 6.0 million.

Other notable takeaways from the April NMRI include:

• For the first time, the share of high-risk loans exceeded the share of low-risk loans.

• The NMRI for first-time buyers hit 15.28 percent, a new series high. The credit standards for first-time buyers are not tight, with the median FICO score of first-time buyers in April remaining unchanged at 705, slightly below the median for all individuals in the US.

• FHA’s cut in its annual mortgage insurance premium, which took effect in late January, appears to have been largely a zero-sum game to date, with much of the higher FHA volume representing loans poached from other agencies.

• The collapse in the share of agency loans originated by large banks continued in April, offset by nonbanks, which have much less capital and much higher mortgage risk.

The NMRI results in April pop the balloon of the upbeat Commerce Department report released last Tuesday, which found new home sales of single-family units rose more than expected in April and the median price surged. Sales increased 6.8 percent to a seasonally adjusted annual rate of 517,000 units. March’s sales pace was revised up to 484,000 units from the previously reported 481,000 units.

However, this and other sector reports should be taken in context with the NMRI, which clearly shows the government again injecting artificial risk in to the housing market.