This article was first published in AEI by Edward J. Pinto.
The American Enterprise Institute’s Center on Housing Markets and Finance released an update to its indices on mortgage lending practices on February 26, 2018. The release, which covers home mortgage loans originated between September 2012 and November 2017, focused on the First-Time Buyer Mortgage Share and Mortgage Risk Indices (FBMSI and FBMRI).
First-time buyer (FTB) mortgage risk jumped in November, helping FTBs overcome raising prices driven by dwindling inventories of homes for sale. The FTB National Mortgage Risk Index (FBMRI) for November was up .4 ppt from a year ago and up 2 ppts from November 2013. The FBMRI matched its series’ high from October 2017. Setting a new series high, FHA’s First-time Buyer MRI stood at 27.3% in November, up 2.1 ppts from a year earlier. FHA and Fannie Mae’s outsized monthly risk increases are making entry-level homes less affordable, since in a seller’s market, prices rise faster than incomes as long as the marginal buyer, who sets the price for all, has access to higher leverage. FTB volume by count also rose 4% from already elevated levels a year ago.
The main drivers toward greater first-time buyer risk were:
- A massive shift towards higher DTIs after Fannie and Freddie increased their DTI limit to 50 percent without compensating factors. About one-third of FTBs are having a DTI in excess of the QM “limit” of 43 percent.
- Data indicate a distinct reorientation of Fannie Mae’s risk appetite, as its purchase business has shifted away from lower risk towards higher risk loans over the past 6 months.
- A growing share of FTBs with little or no downpayment.
“FHA’s continued growth in leverage is making entry-level homes less affordable, since in a seller’s market, prices rise faster than incomes as long as the marginal buyer, who sets the price for all, has access to higher leverage,” noted Edward Pinto, codirector of the American Enterprise Institute’s (AEI’s) Center on Housing Markets and Finance. “More recently, Fannie Mae’s shift to higher risk loans has added to upward price pressure,” Pinto added.
The implications of leverage during a long-lasting seller’s market, now in its 65th month, are higher house prices concentrated at the lower end of the market where leverage has been increasing the most. On the national level, a long period with few metros experiencing negative home price growth, which is allowing market excesses to build. Moving forward, there will be even more risk as borrowers, especially first-time buyers, are forced to take on more leverage to buy.
“The trend toward higher first-time buyer risk continued this month primarily driven by higher debt-to-income ratios,” said Tobias Peter, senior research analyst of AEI’s Center on Housing Markets and Finance. “As long as this trend continues during a very tight market, expect even higher house prices, especially for entry-level homes, and even greater first-time buyer risk,” noted Peter.
With the addition of the data for November 2017, the First-Time Buyer Mortgage Share and Risk Indices cover almost 7.4 million Agency purchase loans dating back to February 2013. The NMRI covers 30.9 million Agency loans dating back to September 2012, comprised of over 14.9 million Agency purchase loans and just over 16.0 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.
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