National Mortgage Risk Index (NMRI) Hit ‘Record Series High’

The National Mortgage Risk Index (NMRI) hit a series high, as purchase loan volume gained 3% and 19% from June 2015 and 2014, respectively. Still, the American Enterprise Institute’s (AEI’s) International Center on Housing Risk survey said loan demand slowed in July and the NMRI for Agency purchase loans stood at 12.07% in July, down 0.03% from a year earlier and up 0.79% from July 2014.

For the first time since January 2014, the year-over-year credit easing trend has slowed to a stop and in July loan demand slowed.

“This month’s release has good news–for the first time since January 2014, the year-over-year credit easing trend has slowed to a stop, and bad news—risk levels for those borrowers taking out FHA insured home purchase loans have risen to a record series high,” Edward Pinto, the co-director of the AEI’s International Center on Housing Risk said.

Mr. Pinto, the former executive vice president and chief credit officer for Fannie Mae, said “FHA’s borrowers now face a one-in-four chance of default in a serious economic downturn.”

The NMRI measures how government-guaranteed loans with a first payment date in a given month would be impacted during the period of same economic stress as in the 2007 financial crisis. The survey, which is published monthly and includes a nearly complete census of loan-level data for loans guaranteed by Fannie Mae, Freddie Mac, FHA, VA, and Rural Housing, is analogous to stress tests routinely performed by the Federal Reserve on big banks.

An NMRI value of 10% indicates a given set of loans would default in a severe economically stressful conditions. It is based on the actual performance of loans with the same risk characteristics during and after the financial crisis. These same Agency data are also used to track loan volume.

“After 44 consecutive months of credit loosening, it is a relief that the July NMRI has finally reversed its trend due to greater activity from the relatively safer government-sponsored enterprises,” said Tobias Peter, a research analyst of AEI’s International Center on Housing Risk. “The coming months will show if this signals a return towards more prudent lending or is just a temporary blip.”

The National Association of Realtors (NAR) said on Thursday its Pending Home Sales Index (PHSI) increased 1.5% to 110.0, up from a slight downward revision of 108.4. But the NMRI helps to put these otherwise positive pieces of economic data in perspective. With the NMRI, analysts can ascertain whether looser and riskier lending practices are coinciding with favorable economic data released by housing lobby organizations like the NAR.