The composite National Mortgage Risk Index (NMRI) for Agency purchase loans hit another series high in the month of May, clocking in at 12.33 percent. The NMRI is up 0.4 percentage point from the prior 3-month average and 0.7 percentage point on a year-over-year basis, fueled by an increase in the share of high-risk FHA loans.
The survey comes after a report from the National Association of Realtors released Monday showed existing home sales in the U.S. jumped 5.1 percent to the highest level since November 2009. The 5-1/2-year high was widely celebrated as an indicator that the flimsy housing market is beginning to firm.
But Edward Pinto, the former executive vice president and chief credit officer for Fannie Mae, warned that credit standards for first-time buyers are not tight, with the median FICO score of first-time buyers in May coming in below the median in the market. With the NMRI for first-time buyers also hitting a new series high 15.66 percent in May, the NAR report should be cause for concern, not celebration.
“Home sales are surging, with increasing leverage and a strengthening job market spurring an already strong first-time buyer volume,” said Ed Pinto, co-director of AEI’s International Center on Housing Risk. “Liberalized FHA credit terms combined with tight inventories of homes for sales are driving up prices for entry buyers.”
In April, the market share of high-risk loans outnumbered the share of low-risk loans for the first time since NMRI tracking began. In May, the index for VA loans also reached a series high, while Agency loan originations continued to migrate from large banks to nonbanks in May. This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.
“Many first-time buyers with far from pristine credit are purchasing homes every month,” said Dr. Stephen Oliner, a senior fellow at UCLA’s Ziman Center for Real Estate and co-director of AEI’s International Center on Housing Risk. “The false narrative about tight credit is driving efforts to ‘open up the credit box’ that will not end well if left unchecked.”
The NMRI results are based on nearly the universe of home purchase loans with a government guarantee, including 223,000 such purchase loans, a 23-percent increase from 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 6.2 million.
“With leverage unconstrained by the Qualified Mortgage regulation, increasing competition between Fannie and FHA, and eventually Freddie, will slowly introduce destabilizing risk nationally,” Pinto added. “The goal of the NMRI is to quantify and pinpoint these leverage trends in real time.”
Other notable takeaways from the May NMRI include the following:
• The cut in FHA’s annual mortgage insurance premium, which went into effect in late January, has boosted its market share at the expense of Fannie and RHS, FHA’s most direct competitors. In addition, the riskier FHA loans have been used to purchase higher priced homes.
• The decline in the large-bank market share of agency loans slowed in May, and the large-bank share of the FHA market edged up. While too early to say for sure, the downward “seismic” shift away from large banks may be nearing an end.