National Mortgage Risk Index (NMRI): Credit Easing Continued in April

The National Mortgage Risk Index (NMRI) continued to show Agency purchase loan volume increasing, fueled largely by the easing of lending standards. Agency purchase loan volume by count was up 4% from April 2016 and a whopping 34% from April 2014. The increase in volume over the years is being driven as well by continued strength in the labor market.

The NMRI for Agency purchase loans stood at 12.7% in April, up 0.1% from a year earlier and up 0.3% from April 2015. The year-over-year credit easing trend has resumed from an already high level. The first-time buyer NMRI for the Federal Housing Administration (FHA) now stands at 25.4%, up 0.8% from a year earlier.

“With the rate of real home price increases accelerating, particularly for entry level homes, the continuing boom in financed home sales is dependent on the ability of first time buyers to take on ever increasing levels of debt,” said Edward Pinto, codirector of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk. “The five government credit agencies, particularly the FHA, continue to promote this vicious cycle.”

The NMRI for Agency refinance mortgages also gained on net over the last year, also standing at 12.7% in April, up from 11.1% a year earlier. AEI’s International Center on Housing Risk attributes the increase of the refinance NMRI to the influx of riskier no cash out refinance loans.

The NMRI composite of Agency purchase and refinance loans also came in at 12.7% in April (obviously), up from 11.9% a year earlier.

“Volume by count has increased for the past 32 months and is now 34% higher than 3 years ago. Thanks to rising debt burdens, it is simply not true that potential buyers are squeezed out of the market by rising prices,” said Tobias Peter, senior research analyst at AEI’s International Center on Housing Risk.

The NMRI measures how government-guaranteed loans with an origination in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007. For example, an NMRI value of 10% indicates 10% of a given set of loans could be expected to default in a severely stress market. It is based on the actual performance of loans with the same risk characteristics after the financial crisis.

Other notable takeaways from the April NMRI include the following:

• Credit remains readily available for first-time buyers, as risk levels set new series’ highs in January. The first-time buyer NMRI stood at 16.2% in April, up 0.4 percentage point from a year earlier, and well above the Repeat Primary Homebuyer NMRI of 8.5%, down from a year earlier.

• Nonbanks continue to account for a rising share of the purchase market. The gap in riskiness between banks and nonbanks, which boosted overall risk due to high nonbank share, continues to widen.

• Fueled by solid job gains, low mortgage rates, and high and growing leverage, the national seller’s market is now in its 58th month.

The NMRI is published monthly utilizing a nearly complete census of loan-level data for loans guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), Veterans Administration (VA), and Rural Housing. The data from these same agencies are also used to track loan volume, as well as other indicators.

With the addition of the data for April 2017, the NMRI now covers over 27.4 million Agency loans dating back to September 2012. It’s comprised of over 12.7 million Agency purchase loans and over 14.7 million Agency refinance loans. The NMRI is published for purchase loans (with separate indices for first-time and repeat buyers), refinance loans (with separate indices for no-cash-out and cash-out refinance loans), and the composite of purchase and refinance loans.