Agency purchase loans became just a bit riskier in July 2015, climbing upward by 0.6 percentage points from the previous July and marking the seventh consecutive month with a year-over-year increase, according to data released by the American Enterprise Institute (AEI) International Center on Housing Risk released on Monday.
The composite National Mortgage Risk Index (NRMI) for Agency purchase loans was at 12.09 percent in July, up from 11.49 percent in July 2014, according to AEI. The upward trend of the composite NMRI has been largely driven by agency loan originations continuing to migrate from large banks to nonbanks, since nonbank lending is "substantially riskier" than large bank lending, according to AEI.
Aside from the year-over-year hike in the composite index, home prices have increased by 12.5 percent above the trough reached three years ago, driven by increasing leverage in a seller's market, according to AEI. The home price increase is making it more difficult for many low- and middle-income consumers who are aspiring to become homeowners, AEI reported.
"Historically low mortgage rates, an improving labor market, and loose credit standards especially for first time buyers, combined with a 35-month-long seller’s market for existing homes, continue to drive up home prices faster than income growth," said Edward Pinto, co-director of AEI’s International Center on Housing Risk.
The first-time buyer NMRI for July (15.40 percent) was more than 3 percentage points higher than the overall NMRI for the month and was an increase of almost a full percentage point from a year earlier. The first-time buyer NMRI was also well above the repeat buyer NMRI for July, which was 9.68 percent. The number of first-time buyer Agency purchase loans added in July totaled 144,000, an increase of about 16 percent from a year earlier. The robust first-time buyer total for July, as well as an improving job market, and increasing leverage, made for a strong Spring homebuying season. The total of first-time buyer loans covered in the NMRI, including July's total, is now approximately 3.0 million (starting with April 2013).
Also according to AEI's July report, 71 percent of Agency purchase loans had down payments of 5 percent or less, and 25 percent of them had DTI ratios greater than the QM limit of 43 percent. The median FICO score for first-time buyers was 709, a bit below the median for all individuals in the United States. The percentage of first-time buyers with subprime credit (a FICO score below 660) increased in July up to 20.7 percent from 18.9 percent in July 2014; according to AEI, these metrics suggest that credit access for first-time homebuyers is not tight.
The FHA's lowering of the mortgage insurance premium by 50 basis points announced at the beginning of 2015 has increased the FHA's market share from 23.7 percent in July 2014 up to 29.1 percent in July 2015. According to AEI, the increase in the FHA's share of mortgage loans has been at the expense of competing government agencies such as Fannie Mae (market share declined from 36.7 percent in July 2014 down to 33.5 percent in July 2015) and the Rural Housing Service (down from 5.1 percent to 3.3 percent year-over-year in July). Also according to AEI, riskier FHA home loans have been used to purchase higher priced homes.
"FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership," said Stephen Oliner, co-director of AEI’s International Center on Housing Risk. "Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes."
The NMRI is calculated based on nearly all home purchase loans with a government guarantee; in July 2015, this included 264,000 such loans, an increase of 12 percent from the previous July. The total in July brought the number of loans that the NMRI has risk-rated since November 2012 up to 6.7 million.