The composite National Mortgage Risk Index (NMRI) for Agency purchase loans clocked in at 12.14% in August, up 1% from a year earlier. The monthly composite index, which measures how mortgage loans originated month by month would perform under severely stressed conditions, has now gained on a year-over-year basis every month since January 2014.
Agency loan originations continued to migrate from large banks to nonbanks in August, a shift that has accounted for most of the upward trend in the composite NMRI. Nonbank lending is substantially riskier than the large bank business it replaces.
“The strong spring 2015 home buying season has been paced by outsized gains for first-time buyers,” said Edward Pinto, co-director at the AEI International Center on Housing Risk, as well as the former executive vice president and chief credit officer for Fannie Mae.. “Unfortunately, these gains are fueled in part by liberalized credit standards, which is creating demand pressure and driving real home prices higher. This will lead to future instability.”
The NMRI, which was established after the financial crisis that devastated millions of families, is based on nearly the universe of home purchase loans with a government guarantee. In August, the NMRI data included 297,000 such purchase loans, the highest monthly total since the series began. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 7 million.
Yet, it would appear the executive and legislative branches of government, as well as policy-making bureaucrats, continue to ignore the fact the crisis largely stemmed from a failure to understand the build-up of risk in these markets. Buckling under the weight of the housing market lobby, predominantly the National Association of Realtors, which conducts surveys of existing and pending home sales monthly, government agencies continue to back high-risk mortgage loans with loosened restrictions.
First-time buyers accounted for 56.9% of primary owner-occupied home purchase mortgages with a government guarantee, up from 54.5% the prior August. Further, the Agency FBMRI stood at 15.55%, up 1.3% on a year-over-year basis. The Agency FBMRI is nearly 6& higher than the mortgage risk index for repeat homebuyers, and the gap has been widening over the year. Nearly 54 percent of first-time buyer loans were high risk (MRI above 12%) in August, up from 48½ percent a year earlier.
Other notable takeaways from the August NMRI include the following (h/t AEI):
• The Spring homebuying season continued to be strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage. About 156,000 purchase loans for first-time buyers were added in August, up almost 20% from a year earlier, bringing the total in the NMRI to 3.1 million since April 2013.
• The NMRI for first-time buyers hit 15.55%, a new series high, up 1.3 percentage points from a year earlier and well above the Repeat Primary Homebuyer NMRI of 9.63%.
• Fueled by historically low mortgage rates and high and growing leverage, a seller’s market has now prevailed for 35 straight months. As a result, real home prices rose 12.5 percent from the 2012:Q3 trough to 2015:Q2, far outstripping income growth and crimping affordability.
• Credit standards for first-time home buyers are not tight. In August, 70% had down payments less than or equal to 5%, 26% had DTIs greater than the QM limit of 43%, and the median FICO score was 708, a bit below the median for all individuals in the U.S.
• The cut in FHA’s annual insurance premium early this year boosted its market share to 29.8% in August from 22.6% in August 2014, mainly at the expense of Fannie and Freddie.
“The common claim that first-time buyers face tight credit is simply not true,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “If you have a steady job and an ordinary credit score, you can buy a home with little money down.”