The composite National Mortgage Risk Index (NMRI) for Agency purchase loans stood at 11.84 percent in March, up 0.3 percentage point on a year-over-year basis. The risk subindexes for Freddie and the Federal Housing Authority (FHA) both hit series highs in March, while the risk indices for Fannie and the VA were just below their own series highs.
“The lightly capitalized nonbanks have been quite receptive to the push from regulators to expand the credit box,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “One must look outside the banking sector to understand the rising risk in mortgage lending.”
A substantial shift in market share from large banks to non-banks is largely to blame for the upward risk trend, as nonbank lending carries significantly more risk than the larger bank business.
The NMRI results are based on nearly the universe of home purchase loans with a government guarantee. In March, the NMRI data included 142,000 such purchase loans, up from 135,000 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 increased to 5.8 million.
Other notable takeaways from the March NMRI include the following:
• 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 24.49% in March, up 0.1 percentage point from the average for the prior three months and 1.4 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.
• Credit standards for first-time homebuyers are not tight, as the median FICO score for these buyers in March was a bit below the median for all individuals in the U.S. with a score.
“One hears all the time that first-time buyers have limited access to mortgage debt. The FICO data show this isn’t true – many borrowers with weak credit profiles are buying homes,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk.