Mortgage Risk Index Release of April 2018 Data

Mortgage risk jumped in April. The National Mortgage Risk Index (NMRI) for April was up .5 percentage point from a year ago. The April Refinance NMRI set an all-time series’ high primarily driven by a leap in the Cash-out index. With the national seller’s market now in its 70th month, this additional leverage is being absorbed into higher house prices. AEI’s new constant-quality House Price Index reveals faster house price appreciation for lower income neighborhoods, in which the availability of leverage is highest.

The main drivers toward greater risk are three-fold:

• Greater availability of income leverage, which is allowing borrowers to compensate for faster home price appreciation. This trend has been aided by the QM exemption for government agencies and Fannie Mae’s decision in August 2017 to raise its DTI limit.
• A shift toward lower down payment loans. For FHA loans, often times such low down payment loans are combined with down payment assistance.
• A greater presence of cash out (CO) refis; as homeowners’ tappable equity has increased, the share of COs has increased in tandem. COs by nature are riskier than other loan products and they are rapidly getting riskier.

“The multiyear surge in home prices, particularly for entry-level homebuyers continues unabated and is fueled by high-risk mortgages guaranteed by taxpayers,” noted Edward Pinto, codirector of the American Enterprise Institute’s (AEI’s) Center on Housing Markets and Finance. “We see no halt to this trend so long as FHA, the GSEs, and the VA continue offering easy mortgage credit terms which keep demand well in excess of supply,” Pinto added.

The implications of leverage during a long-lasting seller’s market, now in its 70th month, are higher house prices concentrated at the lower end of the market where leverage has been increasing the most. On the national level, there has been 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.

“Leverage matters for house prices,” said Tobias Peter, senior research analyst at AEI’s Center on Housing Markets and Finance. “The greater availability of plain-vanilla leverage for lower-income borrowers during the current seller’s market has clearly inflated a house price boom that is most prevalent at the lower-end of the price spectrum,” Peter added.

With the addition of the data for April 2018, the NMRI covers nearly 32.9 million Agency loans dating back to September 2012, comprising almost 16.1 million Agency purchase loans and over 16.8 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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