April 2016 Mortgage Risk Index from AEI’s ICHR

The NMRI for Agency purchase loans stood at 12.59% in April, up 0.56 percentage point from a year earlier and 1.27 percentage points from April 2014.  The Agency purchase NMRI has increased year-over-year in every month since January 2014.   

April 2016 was another exceptionally strong month for home buyers, as volume hit a series high for the month of April. With leverage continuing to increase and given that April represents the lower volume portion of the home buying season, we expect the remainder of the 2016 spring buying season to remain strong.

Twenty20.

Of the estimated 1½ million first-time buyers in our data over the past year, more than a million bought homes with a downpayment of 5% or less. The sheer scale of this number shows that many, many households are buying their first homes with little money down.

The riskiness of Agency refinance mortgages also increased over the past year.  The NMRI for these loans stood at 11.99% in April, up from 11.03% a year earlier.  In April, refinance loans were somewhat less risky than purchase loans.

The NMRI for the composite of Agency purchase and refinance loans stood at 12.28% in April, up from 11.40% a year earlier, driven by increases for both purchase and refinance loans.  The recent agency refinance loan volume was well below the volume from boom periods.  About 192,000 refinance loans were added in April, down 30% from April 2015.

 Other notable takeaways from the April NMRI include the following:

• First-time buyers have been the focus of the easing in credit standards for Agency purchase loans. The first-time buyer NMRI stood at 15.84% in April, up 0.62 percentage point from a year earlier, and well above Repeat Primary Homebuyer NMRI of 10.21%.

• The cut in FHA’s annual insurance premium in January 2015 continues to buoy its purchase-loan market share; the cut raised FHA’s market share to 29% in April from 23% in March 2015. This increase has come almost entirely at the expense of Fannie Mae, Freddie Mac, and the Rural Housing Service.

• The seismic shift in market share from large banks to nonbanks, which has boosted overall risk due to the high nonbank MRI, may be abating. In April, large banks accounted for about 30% of GSE purchase loans, down from 52% in November 2012.  For FHA purchase loans, large banks have shed even more market share, due to risk aversion; their April share was about 20%, down from 65% in November 2012.

• Fueled by solid job gains, low mortgage rates, and high and growing leverage, the national seller’s market is now in its 43^rd  month. As a result, real home prices are up more than 15% since the 2012:Q2 trough, far outstripping real income growth and crimping affordability.

With the addition of the data for April 2016, the NMRI covers 20.2 million Agency loans dating back to November 2012, comprised of slightly more than 8.9 million Agency purchase loans and 11.3 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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