May 2016 Mortgage Risk Index from AEI’s ICHR

 The NMRI for Agency purchase loans stood at 12.7% in May, up 0.4 percentage point from a year earlier and 1.2 percentage points from May 2014.  The Agency purchase NMRI has increased year-over-year in every month since January 2014.   

The 2016 spring buying season continues to be an exceptionally strong one, as purchase loan volume once again hit series’ highs for the month of May. Growing leverage increases demand pressure against a constrained supply, thereby continuing to drive real home prices higher.

The riskiness of Agency refinance mortgages also increased over the past year.  The NMRI for these loans stood at 11.2% in May, up from 11.0% a year earlier.  The increase from a year earlier was tempered in May by the influx of lower-risk borrowers taking advantage of the drop in mortgage rates.  In May, refinance loans were somewhat less risky than purchase loans.

The NMRI for the composite of Agency purchase and refinance loans stood at 11.9% in May, up from 11.5% a year earlier, driven mainly by the increase for purchase loans.

Other notable takeaways from the May NMRI include the following:

• Credit is readily available for first-time buyers, and standards have loosened for both first-time and repeat buyers over the past year.  The first-time buyer NMRI stood at 15.95% in May, up 0.31 percentage point from a year earlier, and well above Repeat Primary Homebuyer NMRI of 10.22%.

• 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 May 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 May, 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 May 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 44^th As a result, real home prices are up 16% since the 2012 Q2 trough, far outstripping real income growth and crimping affordability.

Of the estimated 1.5 million first-time buyers in our data over the past year, more than a million bought homes with a down-payment of 5% or less. The sheer scale of this number shows that many, many households are buying their first homes with little money down.

With the addition of the data for May 2016, the NMRI covers 20.7 million Agency loans dating back to November 2012, comprised of nearly 9.2 million Agency purchase loans and nearly 11.6 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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