National and State Mortgage Risk Indices Update

Mortgage Risk Index – August 2015 Update

The composite National Mortgage Risk Index (NMRI) for Agency purchase loans stood at 12.09% in July, down 0.2 percentage point from the average for the prior three months, but up 0.6 percentage point from a year earlier. The monthly composite has increased year-over-year in every month since January 2014. Agency loan originations continued to migrate from large banks to nonbanks in July.  This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.   

“Historically low mortgage rates, an improving labor market, and loose credit standards especially for first time buyers, combined with a 35-month-long seller’s market for existing homes, continue to drive up home prices faster than income growth,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. Increasing leverage in a seller’s market is pushing up real home prices (now 12.5 percent above the trough reached in 2012:Q2) moving the goal post further away for many aspiring low- and middle-income homebuyers.

The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.  In July, the NMRI data included 264,000 such purchase loans, up 12% from a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 6.7 million.

Other notable takeaways from the July NMRI include the following:

  • The NMRI for first-time buyers hit 15.40%, up 0.9 percentage point from a year earlier, and well above the Repeat Buyer NMRI of 9.68%. 
  •  The Spring homebuying season has been very strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage. 
  • About 140,000 purchase loans for first-time buyers were added in July, up almost 16% from a year earlier, bringing the total number of first-time home buyer loans in the NMRI to 3.0 million (April 2013 – July 2015).
  • A non-stop seller’s market since September 2012 has been fueled by historically low mortgage rates and high, growing leverage. As a result, real home prices have been increasing since 2012:Q3, far outstripping income growth and crimping affordability.
  • Credit standards for first-time home buyers are not tight.
  • In July, 71% had down payments of 5% or less, 25% had DTIs greater than the QM limit of 43%, and the median FICO score was 709, a bit below the median for all individuals in the U.S. 
  • 20.7% of first-time buyers in July had subprime credit (a FICO score below 660), up from 18.9% in July 2014
  • The reduction in FHA’s mortgage insurance premium cut has boosted its market share to 29.1% in July from 23.7% in July 2014.
  • This increase has come at the expense of its most direct competitors: Fannie Mae (July market share at 33.5% down from 36.7% in July 2014) and the Rural Housing Service (July market share at 3.3% down from 5.1% in July 2014).
  • Riskier FHA loans have been used to purchase higher priced homes.
  • The collapse in large-bank market share continued in July, offset by nonbanks, which have a much higher MRI.

“FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk.  “Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes.”  

Please note, we will not be hosting a National Mortgage Risk Index briefing call this month. Our next call will take place on September 28, 2015 at 11AM ET. No RSVP is necessary at this time. Please contact Mr. Pinto at Edward.Pinto@AEI.org or Dr. Oliner at Stephen.Oliner@AEI.org with any questions.

AEI’s International Center on Housing Risk provides research, commentary, and new tools for measuring risk in housing and mortgage markets.  The recent financial crisis, and the resulting devastation for millions of families, largely stemmed from a failure to understand the build-up of risk in these markets. 

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About Edward Pinto

Edward Pinto
American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes. An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes. Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

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