The National Mortgage Risk Index (NMRI) stood at 12.2% in October, down 0.1% from a year earlier and up 0.2% from September 2016. While the year-over-year credit easing trend has slowed, the level remains high and the trend appears poised to reverse. The FHA’s first-time buyer NMRI set a series’ high at 25.0%, up 1.2% from a year earlier.
“The FHA hit a dubious milestone this month as First-Time Buyers using FHA had a Mortgage Risk Index of 25%, up from 21% in 2013,” said Edward Pinto, codirector of the Center, former executive vice president and chief credit officer for Fannie Mae. “Helping fuel this increase was the 47% of First-Time Buyers with a total pre-tax debt-to-income ratio in excess of 43%.”
Loan demand continued to gain with Agency purchase loan volume increasing 12% and 19% from October 2015 and 2014, respectively. The increase in volume is largely fueled by looser lending standards and an improving labor market.
The NMRI measures how government-guaranteed loans with an origination in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007. An NMRI of 10% for a given set of loans indicates 10% of those loans would be expected to default under severe stress. The index, is based on the actual performance of loans with the same risk characteristics after the financial crisis and covers over 24.6 million Agency loans dating back to September 2012.
Published monthly, the NMRI is comprised of over 11.2 million Agency purchase loans and over 13.4 million Agency refinance loans. Nonbanks continue to represent a rising share of the market, which increases riskiness and continues to widen.
“As mortgage rates normalize, risk will likely start to rise again as agencies, foremost FHA, will accommodate cash-strapped borrowers by raising their debt-to-income ratios,” said Tobias Peter, senior research analyst of AEI’s International Center on Housing Risk.