Briefing on National Mortgage Risk Index and Other Risk Measures

Transcription

1 Briefing on National Mortgage Risk Index and Other Risk Measures Edward Pinto and Stephen Oliner AEI International Center on Housing Risk HousingRisk.org March 24,

2 Key Takeaways from Today s Briefing National Mortgage Risk Index (NMRI) Indices for Fannie/Freddie and FHA/RHS both hit new highs in February, while composite index ticked down as FHA s share eased Risk levels remain higher than is conductive to long-run market stability No discernible impact from QM regulation 138,000 loans added in February, bringing total in NMRI to 2.45 million State-level Mortgage Risk Indices (SMRIs) Wide range across states (lowest: Hawaii; highest: Mississippi) SMRI has been rising in the vast majority of states First release of mortgage risk indices for metro areas Focusing on California. Mortgage risk highest in Central Valley and lowest in San Francisco Bay area 2

3 Background Financial crisis largely stemmed from a failure to understand build-up of housing risk: Mortgage risk House-price (collateral) risk Capital adequacy AEI s International Center on Housing Risk (HousingRisk.org) is addressing this problem: Will provide objective and transparent risk measures Mortgage risk indices published monthly Indices of collateral risk and capital adequacy to be released later this year 3

4 The NMRI Principles behind the NMRI Market stability depends on the preponderance of loans being low risk, defined as good performance under stress NMRI provides a stress test, similar to crash tests for cars and structural stability ratings for buildings in hurricane zones Basics of index construction and coverage Places loans in risk buckets and assesses default risk based on performance of 2007 vintage loans with similar characteristics Currently covers nearly all gov t-guaranteed mortgages for home purchases (about 75% of all purchase loans) Plan to expand coverage later this year to include the VA, non-agency loans, refinances, and second mortgages 4

5 Stressed Default Rates Risk Bucket FICO CLTV DTI Default Rate Very Low % 33% 0.8% Low % 34-38% 4.2% Medium % 39-43% 9.3% High % 44-50% 22.7% Very High > 95% > 50% 45.8% Note: Default rates represent cumulative defaults through year-end 2012 for Freddie Mac s 2007 vintage of acquired loans. The loans included in the calculation are all primary owneroccupied, 30-year fixed-rate, fully amortizing, fully documented, home purchase loans. Takeaway: Huge spread of default rates across risk buckets All 320 risk buckets for home purchase loans are shown at Periodic Table on HousingRisk.org 5

6 NMRI for Home Purchase Loans Fannie/Freddie and FHA/RHS indices edged up further in February, while composite index ticked down because of a decline in the FHA loan share. 24% Stressed default rate 24% 20% FHA/RHS: +1.5 ppt, from 22.3% to 23.8%* 20% 16% FHA/RHS share of purchase loans: Dec-13: 28.2%; Jan-14: 33.0%; Feb-14: 31.5% 16% 12% 12% Composite: +1.0 ppt, from 10.6% to 11.6%* 8% Fannie/Freddie: +1.0 ppt, from 4.9% to 5.9%* 8% 4% Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 4% * Index changes measured from first month shown. Source: AEI International Center on Housing Risk, Separate index not available for VA guaranteed loans. RHS is Rural Housing Service. 6

7 Calibrating Mortgage Safety NMRI purchase loans Latest date Latest value vintages (est.) 1990 vintage (est.) 2007 vintage (est.) Composite index Feb. 11.6% NA 6% 19% Fannie and Freddie Feb. 5.9% NA 4% 13% FHA Feb. 24.5% 3% 15% 30% An index value of less than 6 is indicative of conditions conducive to a stable market. Composite index substantially above 1990 level, but not approaching 2007 level when underwriting was exceptionally lax Fannie/Freddie index somewhat above 1990 level and rising FHA index extremely high. Sharp contrast with safe underwriting during

8 Purchase Loan Origination Shares, by Risk Level 50% Loan risk at a higher level than is conducive to long-run market stability. Lowrisk loans accounted for 42.8% of February activity, down from 46.4% six months earlier. 50% 45% Low risk 45% 40% Low risk defined as stressed default rate of less than 6%, medium risk is 6% to 12%, and high risk is 12% or higher. High risk 40% 35% 35% 30% 30% 25% 25% Medium risk 20% Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 20% Source: AEI International Center on Housing Risk, 8

9 GSE Low-Risk Origination Shares, Purchase Loans Continued downward trend in low-risk share, especially for Fannie Mae. 74% 74% 72% 72% 70% 68% Freddie Mac 70% 68% 66% 66% 64% Combined 64% 62% 62% 60% Note: FHA/RHS low-risk share (not shown) is about 2%. Fannie Mae 60% 58% Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 58% Source: AEI International Center on Housing Risk, 9

10 Recent Headlines about Credit Availability Now accepting applications: A new word for subprime (HousingWire, Feb. 25) Analysts Warn of Next Generation of Subprime Lenders (The MReport, Feb. 25) New Lenders Spring Up to Cater to Subprime Sector (WSJ, Mar. 5) Lenders Reach Farther Out Credit Spectrum to Fill Capacity (Mortgage News Daily, Mar. 19) 10

11 Reasons for Caution Two immutable laws of mortgage lending: Mortgage bankers originate what they can sell and sell what they originate Political pressures will likely degrade sound lending practices over time QM credit box is broad and deep. All the home purchase loans covered by the NMRI today are qualified mortgages, yet: Half have a down payment 5% One-quarter have a debt-to-income ratio > 43% One-third of FHA s home purchase loans have a FICO credit score below 660, the demarcation line for subprime credit House-price risk is rising As of 2013:Q3, home prices overvalued in real terms by approximately 18% nationally, led primarily by exuberant gains in the West... * * Source: Fitch Ratings, U.S. RMBS Sustainable Home Price and Economic Risk Factor Report January

12 Purchase Loans with DTI Greater Than 43% No discernible impact from QM regulation. Federally guaranteed loans are exempt from DTI limit in QM, so share with DTI > 43% likely to remain high. 50% 50% 45% 45% 40% FHA/RHS 40% 35% 35% 30% 30% 25% 20% Composite 25% 20% 15% Fannie/Freddie 15% 10% Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 10% Source: AEI International Center on Housing Risk, 12

13 Additional Detail on DTIs February 2014 DTI > 38% DTI > 43% DTI > 50% Composite 46% 24% 4% Fannie/Freddie 38% 16% 0% FHA 66% 45% 16% RHS 46% 21% < 1% Source: AEI International Center on Housing Risk, 38% of Fannie/Freddie loans have DTIs > 38%, up from only 14% in 1990 (based on Fannie random sample) Mortgage rates in 1990 were 10% compared to 4.5% today As a result of lower rates and higher Fannie/Freddie DTIs, income leverage today is double that of 1990 FHA is only agency with a sizable share of loans with DTIs > 50%. This is an extremely high payment burden. 13

14 Purchase Loans with Down Payment of 5% or Less Half of all purchase loans and a quarter of Fannie/Freddie purchase loans have a minimal down payment. 55% 55% 50% 50% 45% Composite 45% 40% 35% All FHA/RHS purchase loans are assumed to have down payment of less than 5%. 40% 35% 30% 25% Fannie/Freddie 30% 25% 20% Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 20% Source: AEI International Center on Housing Risk, 14

15 State and Metro Area Mortgage Risk Indices Comparison to NMRI Exactly the same methodology applied to loans at the state and metro-area levels Presented for rolling three-month periods (e.g., Dec. 13 Feb. 14) instead of individual months because of small numbers of loans Released state-level mortgage risk indices (SMRIs) last month Are releasing first batch of metro-area indices today Focusing on California in initial release Coverage limited to Freddie Mac loans at present. Fannie Mae and FHA/RHS don t provide sufficient geographic information on their loans Have requested the necessary geographic information 15

16 SMRI for Home Purchase Loans All Agency Composite, Dec 13 Feb 14 Most states have a composite SMRI between 9.5% and 13%. Those at the extremes tend to have high or low concentrations of FHA/RHS loans. 16% 15% 14% Sand States 13% 12% 11% 10% 9% 8% 7% 6% MS LA WV RI AR AL OK NV TX IN KY GA OH UT NM MI AZ MO MD TN ID WY PA SC NH KS ME FL CA IL WA AK CT NJ CO VA NE ND NC DE MN IA NY WI SD MT MA OR VT DC HI Source: AEI International Center on Housing Risk, 16

17 SMRI for Home Purchase Loans Fannie/Freddie, Dec 13 Feb 14 Variation across states for Fannie/Freddie loans is less than for all-agency composite. All states have an SMRI between 5% and 7%. 7.5% 7.0% 6.5% Sand States 6.0% 5.5% 5.0% 4.5% 4.0% ID MS WY LA UT ND RI NE OK NM WI TX IA IN WA IL AL MA OH MN MI KS NH AK MO SD AR GA PA MD KY NV WV SC CO CT TN FL MT VT AZ CA VA ME OR NC NJ NY DC HI DE Source: AEI International Center on Housing Risk, 17

18 SMRI for Home Purchase Loans FHA/RHS, Dec 13 Feb 14 The SMRI for every state is very high above 20%. Sand States near the top of the range. 26% Sand States 25% 24% 23% 22% 21% 20% TX CA CO IL NV NJ RI FL MA ID WA AZ OK NM MD SC LA GA MS NH OH IN WI CT VA UT IA NC MO DC NE NY MI PA KY AR VT TN KS AL DE ND OR WY MN WV SD HI ME AK MT Source: AEI International Center on Housing Risk, 18

19 Change in SMRI for Home Purchase Loans Fannie/Freddie SMRI for Fannie/Freddie loans increased in all but four states from Sept-Nov 2013 to Dec 2013-Feb % Dec '13 - Feb '14 6.5% Increase in MRI 6.0% 5.5% Decrease in MRI 5.0% 4.5% Sept '13 - Nov '13 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Source: AEI International Center on Housing Risk, 19

20 Change in SMRI for Home Purchase Loans FHA/RHS SMRI for FHA/RHS loans increased in all but five states from Sept-Nov 2013 to Dec 2013-Feb % Dec '13 - Feb '14 25% Increase in MRI 24% 23% Decrease in MRI 22% 21% Sept '13 - Nov '13 20% 20% 21% 22% 23% 24% 25% 26% Source: AEI International Center on Housing Risk, 20

21 Mortgage Risk Index (MRI) and House Prices in Major California Metro Areas Metro Area/County Oct Dec Freddie Mac MRI Dec Feb Fitch Home Price Overvaluation :Q3 San Francisco 3.3% 3.5% 15-20% 25-30% Oakland 4.0% 4.6% 10-15% 25-30% Los Angeles County 4.4% 5.3% 10-15% 20-25% Orange County 3.8% 4.4% 25-30% > 30% Riverside-San Bernardino 4.8% 5.8% Sustainable 10-15% San Diego 4.4% 5.0% 20-25% > 30% National Average 4.9% 5.4% Note: San Francisco includes Marin, San Francisco, and San Mateo counties; Oakland includes Alameda and Contra Costa counties. Fitch estimates from Fitch Ratings, U.S. RMBS Sustainable Home Price and Economic Risk Factor Report January Mortgage risk indices for most metro areas are below the national average, but are trending up along with home price overvaluation. Only a partial assessment of mortgage risk, as metro-area data for Fannie Mae and FHA/RHS not yet available. 21

22 Freddie MRI for California Metro Areas and Regions Lowest in SF Bay Area, somewhat higher on rest of coast, highest in Inland Empire and Central Valley. Has risen in all areas since late Oct Dec 2012 Dec Feb National average, Dec 2013-Feb 2014 = 5.4% SF Bay Area Central Coast San Diego Los Angeles Sacramento Inland Empire Central Valley Note: SF Bay Area includes the San Francisco and Oakland metro areas plus Napa, San Benito, Santa Clara, Santa Cruz, Solano, and Sonoma counties. Central Coast includes Monterey, San Luis Obispo, Santa Barbara, and Ventura counties. Los Angeles includes LA and Orange counties. Sacramento includes El Dorado, Placer, Sacramento, and Yolo counties. Inland Empire includes Riverside and San Bernardino counties. Central Valley includes Butte, Fresno, Imperial, Kern, Kings, Madera, Merced, San Joaquin, Shasta, Stanislaus, Sutter, Tulare, and Yuba counties. Source: AEI International Center on Housing Risk, 22

23 Release Dates for Rest of 2014 At 10 AM on dates shown below No change from previous schedule Monday April 28 Tuesday May 27 Monday June 30 Monday July 28 Monday August 25 Monday September 29 Monday October 27 Monday November 24 Monday December 22 23