Mortgage Risk Index Release of October 2017 Data

The American Enterprise Institute’s International Center on Housing Risk released its monthly update to the series on mortgage lending practices on January 29, 2018. The loan-level data, which are for loans originated between September 2012 and October 2017, are risk-rated based on default risk factors to produce the National Mortgage Risk Index (NMRI), the best measure available of lending standards used in current mortgage lending.

Twenty20.

Mortgage risk jumped in October for Agency purchase loans with many individual agency indices setting new series’ highs. The composite Purchase NMRI series set a series’ high for the month of October, up 0.4 ppt and 2.1 ppt from October 2016 and 2012 respectively, while FHA, GSE, and VA purchase indices set new series’ highs. The Refi NMRI remained close to its series high set in March 2017, primarily driven by a leap in the Cash-out index, which also set a new series’ high.

Growth in demand continues to be too reliant on further agency credit easing, seen as needed to offset headwinds from a slightly less accommodative monetary policy and accelerating home price increases. Given the strengthening seller’s market, which has now reached historic proportions, further credit easing is easily capitalized into higher home prices.

The main drivers towards greater risk are four-fold:

• A greater presence of first-time buyers (FTBs); FTBs MRI is now almost twice as high as Repeat Buyer MRI and is rapidly rising. This is driven by rapidly rising house prices and enabled by looser lending.
• Continued credit easing from nonbanks; while the share of nonbanks has stabilized at around 60%, all of the year-over-year increase in risk is attributable to nonbanks as banks have maintained their more moderate levels of risk.
• A massive shift toward higher DTIs after Fannie and Freddie increased their DTI limit to 50% without compensating factors.
• Data indicate a distinct reorientation of Fannie Mae’s risk appetite, as its purchase business has shifted away from lower risk toward higher risk loans over the past 6 months

“Purchase origination data for October 2017 showed both increased credit risk and mortgage demand,” noted Edward Pinto, codirector of the American Enterprise Institute’s (AEI’s) Center on Housing Markets and Finance. “Growth in demand continues to be too reliant on further agency credit easing, which is seen as needed to offset headwinds from a slightly less accommodative monetary policy and accelerating home price increases,” Pinto added.

The implications of leverage during a long-lasting seller’s market, now in its 64th 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 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.

“Fannie Mae’s extension of its DTI limits up to 50% without compensating factors, which is the latest example of government housing policies, has failed,” said Tobias Peter, senior research analyst at AEI’s Center on Housing Markets and Finance. “Instead of bringing income-constrained borrowers into the market, it is making housing less affordable by adding more fuel to a national house price boom that is pricing them out of the market,” Peter added.

View the entire release on the Center on Housing Markets and Finance website. 

Please find data and additional materials from our monthly call below. If you would like to receive invitations to our monthly update calls, please email [email protected].

Data (Excel Files):

Methodology

Presentation materials:

Charts of the Month

The following charts are indicative of the continuing credit easing trend some 5 1/2 years into Housing Boom 2.0.

• Growth in housing demand continues to be too reliant on further agency credit easing
• Credit easing, targeted particularly to first-time home buyers, is seen as needed to offset headwinds from a slightly less accommodative monetary policy and rapidly accelerating home price increases.
• The FHA and Fannie Mae are the leaders in providing highly accommodative lending policies.
• As has been the case in past instances of accommodative lending during a boom, rather than making homes more “affordable,” much of the credit easing in quickly capitalized into higher home prices.