February Mortgage Risk Index from AEI’s ICHR

View this post on AEI’s International Center on Housing Risk website. 

With the addition of the data for February 2016, the National Mortgage Risk Index (NMRI) covers 18.6 million agency loans dating back to November 2012, comprised of 8.5 million agency purchase loans and 10 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.

The MRI release and the MRI briefing conference call today provided risk ratings for federal agency mortgages securitized through February 2016 and reviewed risk trends at the national and state level and for selected California and Texas metro areas.

Pixabay, OpenSource.

Key findings in this month’s release:

About National Mortgage Risk Index (NMRI) coverage

• The February NMRI covers 18.6 million agency loans back to November 2012.
• This total consists of slightly more than 8.5 million agency purchase loans and 10 million agency refinance loans. (VA refinance loans have not yet been risk rated.)
• NMRIs now 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 refis.
  • Composite of purchase and refinance loans.
• Purchase loan NMRI remains the primary measure for monitoring mortgage risk and the impact of housing policy, particularly with respect to first-time buyers.
• Refinance loan NMRI contributes to overall assessment of changes in leverage.

Purchase loans

• Credit standards for agency purchase loans have continued to loosen.
  • NMRI for agency purchase loans stood at 12.30% in February, up 0.43 ppt. from a year earlier.
  • The index has increased year-over-year in every month since January 2014.
• First -time buyers (FTBs) have been the focus of the easing.
  • First-time Buyer NMRI is at 15.72%, up 0.71 ppt. from a year earlier, and well above Repeat Primary Homebuyer NMRI of 9.03%.
  • Profile of FTBs in February:
    • 70% had down payments of 5% or less, up from 68% a year earlier.
    • 28% had DTIs greater than the QM limit of 43%, up from 25% a year earlier.
    • 22% had subprime credit (FICO score below 660), up from 21% a year earlier.
  • As expected, purchase loan volume rebounded in February, driven by looser lending and an improving job market.
    • Total volume in February was up 9% from a year earlier, paced by a 12% rise for FTBs.
    • January volume had been held down by the implementation of the TILA-RESPA Integrated Disclosure (TRID)* rule, which delayed the closing on some home purchases.
    • The impact of TRID appears to have abated, but some effect likely will continue in coming months.

*TRID took effect for applications dated on or after Oct. 3, 2015 and appears to have reduced loan volume in December and more so in January (based on the loan’s first-payment date, our dating convention).

• FHA’s premium cut raised its purchase-loan market share to 28% in February from 23% in March 2015.
• This increase came at the expense of Fannie (down 2.5 ppts since March) and RHS (down 2.5 ppts).
• Freddie has maintained its share (down only 0.5 ppts) by easing its lending standards, while Fannie and RHS have not.
• Riskier FHA loans have been used to purchase lower priced homes traditionally guaranteed by RHS and higher priced homes traditionally guaranteed by Fannie.
• The seismic shift in market share from large banks to nonbanks continued in February, boosting overall risk as nonbank MRI is much higher.
  • For composite of all agency purchase loans, large bank share fell below 25% in February, down from about 60% in November 2012.
  • For FHA loans, large banks have shed even more market share, fueled by risk aversion.
    • The February share sank below 20%, down from about 65% in November 2012.
  • The latest data could be overstating recent declines, but a steep downward trend is beyond doubt**

**TRID-related delays may also be having some impact on recent bank/nonbank share shifts. 

• Fueled by historically low mortgage rates and high and growing leverage, the national seller’s market is now in its 42nd month.
  • Real home prices are up 15% since the 2012:Q2 trough, far outstripping real income growth and crimping affordability.
  • Calls for reductions in FHA premium and deeper push into FHA’s credit box would add more fuel.
  • As mortgage rates normalize, leverage is likely to rise further unless income gains pick up.

Refinance Loans

• The riskiness of Agency refinance loans has increased over the past year.
  • Refi NMRI stood at 11.4% in February, up from 10.6% a year earlier.
  • In January, refis were less risky than purchase loans (NMRI of 11.4% vs. 12.3%).
• NMRI for composite of Agency purchase and refi loans at 11.9% in February, up 0.6 ppt from a year earlier, driven by increases for both purchase and refis.
• The recent Agency refi volume was well below boom periods.
  • About 164,000 refinance loans added in February, down 4% from February 2015.
    • Cash-out refinances were up 9% from a year earlier, while no-cash-out refis were down 11%.
  • As with purchase volume, impact of TRID-related delays in loan closings has abated, but some effect likely will continue in coming months.
• Cash-out share in February was 40.3%, more than double the share at the start of data in November 2012, boosted by rising home prices.

State and Metro Areas

• State-level Mortgage Risk Indices (SMRIs).
  • There is a wide range across states (lowest composite index: Hawaii and Washington, DC; highest: Mississippi).
  • Trend (December 2015-February 2016 vs. year earlier): SMRI is higher in vast majority of states for agency composite, indicating widespread nature of rising risk profile.
  • Looking beneath the composite, the SMRI for FHA loans is trending down in about 85% of states, as FHA has been poaching better-quality loans from other agencies.
  • Metro-area Indices focusing on California and Texas:
    • State-level mortgage risk is close to the national average in California and well above national average in Texas, with substantial 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 near-term risk is especially high in Houston.

Please find additional materials from our monthly call below.