The National Mortgage Risk Index (NMRI) showed purchase loan volume surged 10% in the month of June on a year-over-year basis. The June NMRI, which is being driven largely by looser, riskier lending standards, demonstrates another month of increased mortgage risk that is getting little attention by the mainstream analysts.
“As a result of loose lending and accommodative monetary policy, the nominal house price-to-income ratio stands at 3.34, up 10% since the early-2012 trough, thus retracing about a third of drop from the 2006 peak to the 2012 trough,” said Edward Pinto, co-director of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk. Mr. Pinto is also a former executive vice president and chief credit officer for Fannie Mae.
The NMRI measures how government-guaranteed loans with a first payment date in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007. It is similar to stress tests routinely performed by the Federal Reserve on the nation’s big banks. An NMRI value of 10% for a given set of loans suggests that 10% of those loans would be expected to default in a severe stress event. It is based on the actual performance of loans with the same risk characteristics after the financial crisis.
The NMRI for Agency purchase loans stood at 12.7% in June, up 0.2 percentage point from a year earlier and 1.0 percentage point from June 2014. The Agency purchase NMRI has increased year-over-year in every month since January 2014. The NMRI is published monthly utilizing a nearly complete census of loan-level data for loans guaranteed by Fannie Mae, Freddie Mac, FHA, VA, and Rural Housing. These same Agency data are also used to track loan volume and other characteristics.
“An increasing share of home buyers are taking out mortgages with burdensome monthly payments,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk and senior fellow at UCLA’s Ziman Center for Real Estate. “Indeed, more than a quarter of recent government-guaranteed home purchase loans had a debt-to-income ratio that exceeded the limit set by the Qualified Mortgage rules in the wake of the financial crisis.”
In contrast to purchase loans, the NMRI for Agency refinance mortgages edged lower on net over the past year. The NMRI for these loans stood at 11.2% in June, down from 11.4% a year earlier. Lower risk borrowers taking advantage of declining mortgage rates are holding down the refinance NMRI, overall.
The NMRI for the composite of Agency purchase and refinance loans stood at 12.0% in June, up from 11.9% a year earlier, and comes as the housing lobby (National Association of Realtors) releases their indices for the month. Refinance increases were fueled by the increase in the NMRI for purchase loans.
With the addition of the data for June 2016, the NMRI covers nearly 21.3 million Agency loans dating back to November 2012, comprised of nearly 9.5 million Agency purchase loans and about 11.8 million Agency refinance loans. The NMRI is published for purchase loans (with separate indices for first-time and repeat buyers), refinance loans (with separate indices for no-cash-out and cash-out refinance loans), and the composite of purchase and refinance loans.