National and State Mortgage Risk Indices Quietly Climb to Concerning Levels

National and State Mortgage Risk Indices Update

The composite National Mortgage Risk Index (NMRI) for Agency home purchase clocked in at 12.09% in September, up 0.8% once again on a year-over-year basis. The monthly composite gauge of the share of mortgage risk in the housing market has gained year-over-year in each month since January 2014.

According to Edward Pinto, a former executive vice president and chief credit officer for Fannie Mae, the continued migration of Agency loan originations from large banks to nonbanks in September and throughout the previous 12 months has accounted for much of the upward trend in the composite NMRI. Nonbank lending is substantially riskier than the large bank business it replaces.

“The cut in FHA’s annual insurance premium early this year has largely resulted in the purchase of higher priced homes, not increased accessibility,” said Pinto, now codirector of AEI’s International Center on Housing Risk. “This demonstrates once again how affordable housing policies tend not to increase affordability, and in many cases reduce it.”

The NMRI results are based on nearly the universe of home purchase loans with a government guarantee. In September, data surveyed and composited by the NMRI included 298,000 such purchase loans, which is the second highest monthly total since the Center on Housing Risk began tracking. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 has increased substantially to over 7.3 million.

Other notable takeaways from the September NMRI include the following:

• The spring/early summer homebuying season continued to be strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage. About 155,000 purchase loans for first-time buyers were added in September, up 20% from a year earlier, bringing the total in the NMRI to 3.3 million since April 2013.

• The NMRI for first-time buyers hit 15.47%, up 1.1 percentage points from a year earlier and well above the Repeat Primary Homebuyer NMRI of 9.65%.

• Fueled by historically low mortgage rates and high and growing leverage, a seller’s market has now prevailed for 36 straight months. As a result, real home prices rose 12.5 percent from the 2012:Q3 trough to 2015:Q2, far outstripping income growth and crimping affordability.

• Credit standards for first-time home buyers are not tight. In September, 70% had down payments less than or equal to 5%, 27% had DTIs greater than the QM limit of 43%, and the median FICO score was 708, a bit below the median for all individuals in the U.S.

• The cut in FHA’s annual insurance premium early this year boosted its market share to 29.3% in September from 22.9% in March, mainly at the expense of Fannie Mae and the Rural Housing Service.

“The typical first-time buyer today puts little money down and chooses a mortgage that pays off very slowly,” said Stephen Oliner, a senior fellow at UCLA’s Ziman Center for Real Estate and codirector of AEI’s International Center on Housing Risk. “This combination means that many first-time buyers are only one recession away from being significantly underwater.”

The NMRI was established by AEI’s International Center on Housing Risk as a new tool for measuring risk in housing and mortgage markets following the recent financial crisis, and the resulting devastation for millions of families. While other factors arguably contributed, the subprime mortgage crisis largely resulted from a failure to understand the build-up of risk in these markets.