The composite National Mortgage Risk Index for Agency purchase loans stood at 12.33% in May, up 0.4 percentage point from the average for the prior three months and up 0.7 percentage point from a year earlier, according to the American Enterprise Institute's International Center on Housing RIsk.
The composite risk index hit a series high in May, boosted by an increase in the share of high-risk Federal Housing Administration loans; the index for VA loans also reached a series high.
Agency loan originations continued to migrate from large banks to nonbanks in May.
This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.
“Home sales are surging, with increasing leverage and a strengthening job market spurring already strong first-time buyer volume,” said center co-director Ed Pinto. “Liberalized FHA credit terms combined with tight inventories of homes for sales are driving up prices for entry-level buyers.”
The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.
In May, the NMRI data included 223,000 such purchase loans, up 23% from a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 6.2 million.
Other notable takeaways from the May NMRI include the following:
The spring home-buying season has been off to a robust start, buoyed by strong first-time buyer volume driven by increasing leverage and an improving job market.
The NMRI for first-time buyers hit 15.66%, a new series high. The credit standards for first-time buyers are not tight, with the median FICO score of first-time buyers in May standing at 706, slightly below the median for all individuals in the US.
The cut in FHA’s annual mortgage insurance premium, which went into effect in late January, has boosted its market share at the expense of Fannie and RHS, FHA’s most direct competitors. In addition, the riskier FHA loans have been used to purchase higher priced homes.
- The decline in the large-bank market share of agency loans slowed in May, and the large-bank share of the FHA market edged up. While too early to say for sure, the downward “seismic” shift away from large banks may be nearing an end.
“Many first-time buyers with far from pristine credit are purchasing homes every month,” said center co-director Stephen Oliner. “The false narrative about tight credit is driving efforts to ‘open up the credit box’ that will not end well if left unchecked.”