National Mortgage Risk Index Continues to Climb, Steady Gains Since 2014

The National Mortgage Risk Index (NMRI) for Agency purchase loans gauging housing market risk stood at 12.23% in January, up 0.33% from a year earlier. The NMRI, which measures how government-guaranteed loans with a first payment date in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007, has increased year-over-year in every month since January 2014.

An NMRI value of 10% for a given set of loans indicates that 10% of those loans would be expected to default in a severe stress event, based on the actual performance of loans with the same risk characteristics after the financial crisis.

The increased risk is driven by Agency purchase loan originations continuing to migrate from large banks to non-banks in January. The shift in market share accounts for much of the upward trend in the Agency purchase NMRI because non-bank lending is substantially riskier than the large-bank lending it replaces.

The riskiness of Agency refinance mortgages also increased over the past year and now stand at 11.10% in January, up 0.58% from a year earlier. The data exclude VA refinance loans, which are not yet risk rated by AEI’s International Center on Housing Risk, which conducts the largest housing market survey available.

The NMRI for the composite of Agency purchase and refinance loans stood at 11.70% in January, up 0.44% point from a year earlier, driven by year-over-year NMRI increases for both types of loans.

Meanwhile, the National Association of Realtors, representing the housing market lobby, said this week that their existing homes index gained in January. Yet, they are pushing for legislation to once again increase lending with loosened restrictions and standards. NMRI Analysts say this is not only unnecessary but irresponsible given the current trends.

“The data continue to show that first-time buyers have plentiful access to credit,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk and senior fellow at UCLA’s Ziman Center for Real Estate. “Assertions to the contrary are simply ignoring the facts.”

“The NMRI data along with the NAR’s February 23rd existing home sales release showing both an 8.2% year-over-year increase in median existing home prices and a seller’s market that has now entered its 41st month, confirms home prices are rising at unsustainable levels, feed by low interest rates, continued credit easing, and moderate economic growth,” said Edward Pinto, a resident fellow at AEI and a former executive vice president and chief credit officer for Fannie Mae.

While S&P/Case-Shiller U.S. National Home Price Index covering 20 metropolitan areas was flat last month, it increased 5.8% in the prior survey on a year-over-year basis compared with 5.5%.

“As NAR’s chief economist warned: ‘Home prices ascending near or above double-digit appreciation aren’t healthy – especially considering the fact that household income and wages are barely rising.’”

Other notable takeaways from the January NMRI include the following:

Purchase loan volume in January was little changed from a year earlier. About 185,000 purchase loans were added in January, of which 95,000 were to first-time buyers. These figures likely understate the trend growth in loan volume, as the implementation of the TRID rule appears to have substantially reduced loan volume in January (based on the loan’s first-payment date, our dating convention).

First-time buyers have been the focus of the easing in credit standards for Agency purchase loans. The first-time buyer NMRI stood at 15.75% in January, up 0.74 percentage point from a year earlier, and well above Repeat Primary Homebuyer NMRI of 9.80%.

The cut in FHA’s annual insurance premium early last year raised its purchase-loan market share to 28% in January from 23% in March 2015. This increase has come largely at the expense of Fannie Mae and the Rural Housing Service.

The seismic shift in market share from large banks to nonbanks continued in January, boosting overall risk as nonbank MRI is much higher. The large-bank share of purchase loans sank to 17.3% in January from 22.6% in December and about 65% in November 2012.

Fueled by historically low mortgage rates and high and growing leverage, the national seller’s market, now 41 months old, has strengthened. As a result, real home prices have risen more than 14 percent since the 2012:Q3 trough, far outstripping real income growth and crimping affordability.

The NMRI is similar to stress tests routinely performed to ascertain an automobile’s crashworthiness or a building’s ability to withstand severe hurricane force winds. The NMRI is published monthly utilizing a nearly complete census of loan-level data for loans guaranteed by Fannie Mae, Freddie Mac, FHA, VA, and Rural Housing. These same Agency data are also used to track loan volume and other characteristics.