The composite National Mortgage Risk Index for Agency purchase loans stood at 12.09% in July, down 0.2 percentage point from the average for the prior three months, but up 0.6 percentage point from a year earlier.

The monthly composite, produced by the American Enterprise Institute’s International Center on Housing Risk, has increased year-over-year in every month since January 2014.

Agency loan originations continued to migrate from large banks to nonbanks in July. 

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.   

“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, codirector of the Center.

Increasing leverage in a seller’s market is pushing up real home prices, now 12.5% above the trough reached in the second quarter of 2012, moving the goal post further away for many aspiring low- and middle-income homebuyers.

The NMRI results are based on nearly the universe of home purchase loans with a government guarantee. 

In July, the NMRI data included 264,000 such purchase loans, up 12% 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 6.7 million.

Other takeaways from the July NMRI include:

  • The NMRI for first-time buyers hit 15.40%, up 0.9 percentage point from a year earlier, and well above the Repeat Buyer NMRI of 9.68%. 
     
  • The Spring homebuying season has been very strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage. 
     
  • About 140,000 purchase loans for first-time buyers were added in July, up almost 16% from a year earlier, bringing the total number of first-time home buyer loans in the NMRI to 3.0 million (April 2013 – July 2015).
     
  • A non-stop seller’s market since September 2012 has been fueled by historically low mortgage rates and high, growing leverage. As a result, real home prices have been increasing since 2012:Q3, far outstripping income growth and crimping affordability.
     
  • Credit standards for first-time home buyers are not tight.
    • In July, 71% had down payments of 5% or less, 25% had DTIs greater than the QM limit of 43%, and the median FICO score was 709, a bit below the median for all individuals in the U.S.
       
    • 20.7% of first-time buyers in July had subprime credit (a FICO score below 660), up from 18.9% in July 2014
       
  • The reduction in FHA’s mortgage insurance premium cut has boosted its market share to 29.1% in July from 23.7% in July 2014.
    • This increase has come at the expense of its most direct competitors: Fannie Mae (July market share at 33.5% down from 36.7% in July 2014) and the Rural Housing Service (July market share at 3.3% down from 5.1% in July 2014).
       
  • Riskier FHA loans have been used to purchase higher priced homes.
     
  • The collapse in large-bank market share continued in July, offset by nonbanks, which have a much higher MRI.

“FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership,” said Stephen Oliner, codirector of the Center.  “Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes.”