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National Mortgage Risk Indexfor Purchase Loans Continues to Increase

The composite National Mortgage Risk Index (NMRI) for agency purchase loans rose by 0.76 percentage points year-over-year in October up to 12.14 percent and has now increased year-over-year every month since January 2014, according to AEI. The increase in loan riskiness has been largely driven by the migration in originations from banks to nonbanks, since nonbank lending is substantially riskier than lending from large banks.

The NMRI data covered about 280,000 loans, which represent nearly the universe of home purchase loans with a government guarantee. It is also the third highest monthly total of loans covered in the NMRI data since the series began in November 2012. In that three-year period, the NMRI has risk-rated about 7.6 million loans.

About 144,000 purchase loans for first-time buyers were added to the NMRI in October, which was a year-over-year increase of 21 percent. The total of purchase loans for first-time buyers added to the NRMI since April 2013 rose to 3.4 million with October’s addition. Meanwhile, the NMRI for first-time buyers rose by 1.2 percentage points year-over-year up to 15.62 percent, which was substantially higher than the Repeat Primary Homebuyer NMRI for October (9.62 percent).

The data from AEI suggested that the credit standards for first-time homebuyers may not be as tight as it has been reported. About 70 percent of first-time buyers in October had down payments of 5 percent or less, and more than one-quarter (27 percent) had debt-to-income ratios higher than the Qualified Mortgage (QM) limit of 43 percent. The median FICO score for first-time buyers was below the national median of 708 for all U.S. homebuyers.

“The news cycle is filled with stories about the alleged tightness of credit for first-time buyers,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “Our data show this narrative is untrue. Many first-time buyers with ordinary credit profiles—or worse—get loans every month.”

AEI’s data also indicated that a seller’s market has prevailed for 37 straight months, fueled by historically low mortgage rates and increasing leverage that is already high. The result has been crimped affordability due to a rise in real home prices from their trough in Q3 2012.

“The mortgage credit loosening trend now stretches to 22 months, with first-time buyers accounting for the lion’s share of loosening,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “Given the long running seller’s market, this creates demand pressure that is driving up home prices faster than incomes.”

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