The National Mortgage Risk Index (NMRI) showed purchase loan volume surged 13% in May from a year earlier, fueled by looser lending practices. The NMRI, which measures how government-guaranteed loans with a first payment date in a given month would perform under the same stress seen during the financial crisis in 2007, also showed a 15% jump for first-time buyers.
The NMRI for Agency purchase loans came in at 12.7% in May, up 0.4% on a year-over-year basis and 1.2% from May 2014. The Agency purchase NMRI, which is published monthly based on a nearly complete census of loan-level data for loans guaranteed by Fannie Mae, Freddie Mac, FHA, VA and Rural Housing, has gained year-over-year in every month since January 2014.
An NMRI value of 10% for a given set of loans indicates that 10% of those loans would be expected to default in a severe stress event, based on the actual performance of loans with the same risk characteristics after the financial crisis.
“The 2016 spring buying season continues to be an exceptionally strong one, as purchase loan volume once again hit series’ highs for the month of May,” said Edward Pinto, the former executive vice president and chief credit officer for Fannie Mae now-codirector of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk. “Growing leverage increases demand pressure against a constrained supply, thereby continuing to drive real home prices higher.”
The level of risk associated with Agency refinance mortgages also increased over the past year. The NMRI for these loans came in at 11.2% in May, up from 11.0% a year earlier. The increase from a year earlier was slightly offset in May by a surge in lower-risk borrowers taking advantage of the drop in mortgage rates. In May, refinance loans were somewhat less risky than purchase loans.
“Of the estimated 1½ million first-time buyers in our data over the past year, more than a million bought homes with a downpayment of 5 percent of less,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “The sheer scale of this number shows that many, many households are buying their first homes with little money down.”
The NMRI for the composite of Agency purchase and refinance loans stood at 11.9% in May, up from 11.5% a year earlier, largely fueled by the increase for purchase loans.
Other notable takeaways from the May NMRI include the following via AEI:
• Credit is readily available for first-time buyers, and standards have loosened for both first-time and repeat buyers over the past year. The first-time buyer NMRI stood at 15.95% in May, up 0.31 percentage point from a year earlier, and well above Repeat Primary Homebuyer NMRI of 10.22%.
• The cut in FHA’s annual insurance premium in January 2015 continues to buoy its purchase-loan market share; the cut raised FHA’s market share to 29% in May from 23% in March 2015. This increase has come almost entirely at the expense of Fannie Mae, Freddie Mac, and the Rural Housing Service.
• The seismic shift in market share from large banks to nonbanks, which has boosted overall risk due to the high nonbank MRI, may be abating. In May, large banks accounted for about 30% of GSE purchase loans, down from 52% in November 2012. For FHA purchase loans, large banks have shed even more market share, due to risk aversion; their May share was about 20%, down from 65% in November 2012.
• Fueled by solid job gains, low mortgage rates, and high and growing leverage, the national seller’s market is now in its 44th month. As a result, real home prices are up 16% since the 2012:Q2 trough, far outstripping real income growth and crimping affordability.
including the data for May 2016, the NMRI is comprised of 20.7 million Agency loans dating back to November 2012, including almost 9.2 million Agency purchase loans and 11.6 million Agency refinance loans.