The composite National Mortgage Risk Index (NMRI) for Agency purchase loans, a gauge of housing market risk, hit a new series high for the 3rd straight month. The NMRI stood at 11.93 percent in the month of February, up 0.1 percentage point from the average for the prior 3 months and 0.8 percent from a year earlier.
Within the composite, the risk indices for Fannie/Freddie, the FHA, and the VA all hit series highs in February, also marking the 3rd consecutive month the subindexes have shattered their previous highs. According to analysts, the marked shift in market share from large banks to nonbanks accounts for much of the sector’s upward risk trend, as non-bank lending is substantially riskier than the large bank business it replacing due to looser lending practices in the name of redistribution.
“The migration of mortgage lending away from large banks is an important story,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “Lightly regulated nonbank lenders have been more than willing to make risky loans, with taxpayers ultimately on the hook if defaults mount.”
The NMRI results are based on nearly the universe of home purchase loans with a government guarantee. In February, data from the NMRI index was comprised of 204,000 such purchase loans, up from 186,000 loans a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 has increased to 5.7 million.
Notable takeaways from the February NMRI include the following via AEI’s International Center on Housing Risk:
- The QM regulation has not restrained the volume of high DTI loans.
- FHA is not compensating for the riskiness of its high DTI loans, while Fannie and Freddie have been doing so only to a limited extent. In addition, Fannie and Freddie are not compensating for the riskiness of high CLTV loans.
- FHA’s NMRI stood at 24.48% in February, up 0.2 percentage point from the average for the prior three months and 1.6 percentage points from a year earlier. The current level implies that nearly one-quarter of FHA’s recently guaranteed home purchase loans would be projected to default under severely stressed conditions akin to the 2007-08 financial crisis.
“Our data confirm the push by regulators to loosen lending standards is heavily reliant on layering of, not compensating for, risks,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “This is true for both low downpayment and high debt-to-income lending.”