November Mortgage Risk Index from AEI’s ICHR

Here are the key findings in this month’s release, available also here at AEI’s International Center on Housing Risk website.  

National Mortgage Risk Index (NMRI) for Agency purchase loans:

• Mortgage credit has continued to loosen, especially for first-time buyers.
  • The NMRI for first-time buyers hit 15.81%, a new series high; the November level is up 1.0 percentage point from a year earlier and is well above the Repeat Primary Homebuyer NMRI of 9.83%.

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• The pace of homebuying continued to be strong, with loan volume in November up 15% from a year earlier. The overall volume was buoyed by strengthening demand from first-time buyers, driven by looser lending and an improving job market.
  • About 135,000 purchase loans for first-time buyers were added in November, up 19% from a year earlier, bringing the total in the NMRI to 3.6 million since April 2013.

• Fueled by historically low mortgage rates and high and growing leverage, a seller’s market has now prevailed for 38 straight months.
  • As a result, real home prices are up 14.2% since 2012 Q2 trough, far outstripping real income growth and crimping affordability.

• Credit standards for first-time home buyers are not tight.
  • In November, 70% had down payments less than or equal to 5%, 27% had DTIs greater than the QM limit of 43%, and the median FICO score was 706, a bit below the median for all individuals in the US.

• The cut in FHA’s annual insurance premium early this year boosted its market share to 29.3% in November from 22.9% in March.
  • This increase has come largely at the expense of Fannie Mae and the Rural Housing Service.

• The seismic shift in market share from large banks to nonbanks continued in November, boosting overall risk as nonbanks have a much higher MRI.
  • In November, the large bank share was 27%, down from more than 60% three years earlier.

State-level Mortgage Risk Indices (SMRIs):

• There is a wide range across states (lowest composite index: Hawaii and Washington, DC; highest: Mississippi).

• Trend (September-November 2015 vs. year earlier):
  • The SMRI was higher in nearly all states for the agency composite, indicating the widespread nature of the rising risk profile.
  • Looking beneath the composite, the SMRI for FHA loans is trending down in every state, as FHA has been poaching better-quality loans from other agencies.

Metro-area Indices: 

• Focusing on California and Texas:
  • State-level mortgage risk has moved above the national average in CA and is well above the national average in TX, with wide variation across metro areas. Risk is greatest in areas with lower income and high minority shares.
  • House price risk in both states is above the national average, and is especially high in Houston.

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