Mortgage Risk Index Release of November 2015 Data

The composite National Mortgage Risk Index (NMRI) for Agency purchase loans stood at 12.34% in November, up 0.67 percentage point from a year earlier.  The monthly composite has increased year-over-year in every month since January 2014.  In November, the NMRI data included approximately 260,000 such purchase loans. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 rose to nearly 7.9 million.

The MRI release and the MRI briefing conference call on December, 21, 2015, provided risk ratings for federal agency mortgages securitized through November 2015 and reviewed risk trends at the national and state level and for selected California and Texas metro areas.

Click here to scroll through the December 2015 Mortgage Risk Index briefing presentation.

Key findings in this month’s release:

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%.
• 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 percent 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 U.S.
• 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.

Listen to the full audio recording of the December briefing call with Edward Pinto and Stephen Oliner:

NMRI for Home Purchase Loans

The composite index is trending higher after accounting for seasonal effects. Unless household income accelerates, future support for the housing market is likely to involve an increase in leverage from an already high level.

Composite NMRI: Credit Easing Trend Nears 3 Years

The composite NMRI has increased an average of about .75 ppt. year-over-year since June 2014, with first-time buyers accounting for nearly all of the rise since early this year. At this pace, the NMRI would rise to 18% by 2023, near the level reached in 2007.

Aggregate Loan Default Risk

With both the NMRI and loan volumes increasing, aggregate default risk (which measures the combined effect of loan-level risk and volume) has been rising. FHA now accounts for more than half of the aggregate agency risk.

Risk Overlap Between GSEs and FHA         

There is limited overlap between GSEs and FHA, with GSEs concentrated at the lower end of the MRI distribution and FHA at the higher end. The overlap is concentrated between 8% and 20% for MRIs.

DTI Distributions, Agency Primary Purchase Loans*

DTIs have been shifting higher as the rise in house prices has been outpacing income gains. The share of DTIs below 34% has declined, with an offsetting rise in the share of DTIs above 40%.

Increasing Leverage in Seller’s Market Fuels Price Booms

There has been a 14% increase in real home prices since the early 2012 trough. This pattern is similar to the initial years of the prior full-blown seller’s market that began in 1998. If this trend continues, the risk of a serious house price correction will become ever larger.

NMRI Change in Credit Standards by Lender Type

• Composite: easing of standards except at banks
• GSEs: standards generally little changed
• Ginnie: easing in the aggregate, but not for any single lender type
• Aggregates generally show easing while the more narrowly-defined cells in the table do not, owing to two mix shifts:
  • Shift from GSEs toward higher-risk FHA loans
  • Shift from banks to higher-risk nonbanks

Home Purchase Mortgage Risk Index (MRI) in Major California Metro Areas

Columns with blue italicized header updated since last briefing

• California state-level MRI has moved above the national average, with a notable rise in San Francisco metro area
• MRIs are highest in Riverside-San Bernardino and the Central Valley, where FHA volume is concentrated

Home Purchase Mortgage Risk Index (MRI) in Major Texas Metro Areas

Columns with blue italicized header updated since last briefing

• Texas state-level MRI is above the national average, with wide variation across metro areas
• MRIs are highest in San Antonio, where VA and FHA volume are concentrated

Housing Risk in Major California & Texas Metro Areas

Columns with blue italicized header updated since last briefing

California

• California house price risk over next 1-2 years has receded, but longer-term risk remains substantial as prices are above sustainable levels
• Affordability (measured by median house price relative to median household income) has deteriorated

 Texas

• House price risk over next 1-2 years is very high in Houston, moderate in Austin, and low in Dallas and San Antonio. Longer-term risk is substantial in all metros – on par with California.
• Affordability has deteriorated, as house prices have risen faster than income
• Going forward, the lower oil prices will further increase house price risk, especially in the Houston market

Release Dates in 2016

• At 11 AM ET on dates shown below, which are the last Monday of the month, except as shown in bold italics.

Note: Press release date for First-time Buyer Share and Risk Indexes is one week before the NMRI briefing.  Next release will be on January 18.