The American Enterprise Institute’s Center on Housing Markets and Finance released its monthly update to the recently-updated AEI Housing Market Indicators on January 28, 2019, which now includes data on mortgage risk, house price appreciation, and home sales. This month’s briefing was focused on the National Mortgage Risk Index, the best measure available of lending standards used in current mortgage lending.
This month’s main takeaways include:
- Mortgage risk jumped in October with all indices setting new series’ highs for the month.
- The composite Purchase National Mortgage Risk Index (NMRI) was up 0.4 percentage points from Oct. 2017.
- Federal Housing Administration (FHA) index set a new series’ high at 28.2 percent.
- Refi NMRI also set a new series’ high primarily due to a higher Cash-Out Refi NMRI.
- Higher NMRI indicates agencies continue to increase leverage to maintain levels of mortgage activity and in furtherance of their “affordable housing” mission.
- FHA continues to loosen at a breath-taking pace.
- Fannie’s purchase risk index in Oct. 2018 was 1.4 percentage points higher than Freddie’s.
- Over the last 3 years, a shift towards higher DTIs has primarily driven the NMRI higher.
- Spotlight on FHA lending indicates that:
- FHA’s credit box is wide, therefore credit for entry-level buyers is not tight.
- FHA is adding mostly high risk borrowers and their risk index keeps climbing through risk layering.
- Agency purchase volume was down from a year ago.
- Purchase volume by count was down 3.9 percent from Oct. 2017, but up 37 percent from Oct. 2013.
- The decline was largely driven by the increase in the mortgage rate to over 4.5 percent earlier in the year.
- Maintaining purchase volume continues to be reliant on further agency credit easing, seen as needed to offset headwinds from gradually rising interest rates resulting from slightly less accommodative monetary policy and rapid home price increases.
- This credit easing is allowing mainly first-time buyers to forego a quality adjustment despite rising house prices and rising mortgage rates.
“FHA’s and the Bureau of Consumer Financial Protection’s pro-cyclical policies are continuing to drive home prices higher for entry-level buyers and are exposing buyers to an unsustainable home price boom,” noted Edward Pinto, codirector of the AEI’s Center on Housing Markets and Finance. “As these policies since late-2012 have needlessly driven up low price tier homes by an additional $23,000, it is time both took counter-cyclical steps to protect homebuyers,” Pinto added.
The implications of leverage during a long-lasting seller’s market, now in its 76th month, are higher house prices concentrated at the lower end of the market and in lower income neighborhoods 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.
“Reports of the end of current housing boom are exaggerated,” said Tobias Peter, senior research analyst at AEI’s Center on Housing Markets and Finance. “Inventories remain mostly tight, especially for entry-level homes, access to credit continues to be expanding, especially for first-time buyers, and mortgage rates have recently fallen below 4.5% again. All this points to a continuation of the boom at lower price points,” Peter added.
With the addition of the data for October 2018, the NMRI covers over 35.4 million Agency loans dating back to September 2012, comprised of over 17.9 million Agency purchase loans and over 17.5 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.
Please find materials from monthly call below. For data on the national mortgage risk index, please use our Mortgage Risk Index Interactive.
This article was originally posted here, and has been republished with permission from the American Enterprise Institute’s Center on Housing Markets and Finance.