National and State Mortgage Risk Indices Expand, Gain Year-Over-Year

Mortgage Risk Indices Update for December

The National Mortgage Risk Index, a gauge of housing market risk for Agency purchase loans, gained .55 year-over-year to 12.29% in December. The NMRI gained year-over-year in every month since January 2014, reflecting the impact of Agency purchase loan originations migrating from large banks to nonbanks.

This month’s NMRI has been expanded to include 9.7 million Fannie, Freddie, FHA, and Rural Housing refinance loans dating back to November 2012. AEI’s International Center on Housing Risk introduced two new risk metrics this month, including the NMRI for Agency purchase and refinance loans and the NMRI for Agency refinance loans.

“The addition of nearly 10 million Agency refinance loans to the NMRI is an important milestone, as it brings the risk rated loan total to nearly 18 million loans,” said Edward Pinto, codirector of the International Center on Housing Risk. “In future months we expect to add VA refinances and private (non-Agency) purchase and refinance loans, which are expected to bring the NMRI total to 22 million loans, thereby creating a marketwide National Mortgage Risk Index.”

However, the riskiness of Agency refinance mortgages declined slightly over the past year to 11.18% in December, down 0.19 percentage point. Worth noting, the results exclude VA refinance loans, which are not yet risk rated by the Center. Meanwhile, the NMRI for the composite of Agency purchase and refinance loans (new) came in at 11.81% in December, up 0.22 percentage point from a year earlier. This composite index is trending up more slowly juxtaposed to the index for purchase loans overall, fueled largely by a smaller decline for refinance loans.

The NMRI, which was established post-subprime mortgage crisis to gauge housing market risk, is based on nearly the universe of home purchase and refinance loans with a government guarantee. In December, according to the report, the NMRI data covered roughly 239,000 purchase loans and 182,000 refinance loans. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since December 2012 rose to 17.8 million.

“The data clearly show that first-time buyers have plentiful access to credit,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “Those who assert that credit is tight are ignoring the facts.”

Other notable takeaways from the December NMRI include the following (H/T AEI):

• The pace of homebuying remained strong, with purchase loan volume in December up 7% from a year earlier. The overall volume was buoyed by continued robust demand from first-time buyers, driven by looser lending and an improving job market.

• The NMRI for first-time buyers hit 15.76%, just off the series high set in November 2015; the December level is up 0.92 percentage point from a year earlier and is well above the Repeat Primary Homebuyer NMRI of 9.84%.

• Credit standards for first-time home buyers are not tight and getting looser. In December, 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 706, 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 purchase loan market share to 29% in December from 23% in March. This increase has come largely at the expense of Fannie Mae and the Rural Housing Service.

• Fueled by historically low mortgage rates and high and growing leverage, a seller’s market has now prevailed for 38 straight months. As a result, the rise in real home prices from the 2012:Q2 trough has far outstripped income growth, crimping affordability.

• The seismic shift in purchase market share from large banks to nonbanks continued in December, boosting overall risk as nonbanks have a much higher MRI. In December, the large bank share was 25%, down from about 60% in November 2012. For FHA loans, the large-bank share in December was even lower – about 15%.