First-time buyer (FTB) mortgage risk rose in February, helping homebuyers looking to purchase a home for the first-time to overcome rising prices, according to the American Enterprise Institute (AEI) Center on Housing Markets and Finance’s latest report on mortgage lending practices.
The AEI Center released an update to its indices on mortgage lending practices on Tuesday, which covers home mortgage loans originated between September 2012 and February 2018 and focused on First-time Buyer Mortgage Share (FBMSI) and First-time Buyer Mortgage Risk (FBMSR).
According to AEI’s data, the FBMRI for February was up 0.5 percentage points from a year ago was up 2.3 percentage points from February 2013. The FBMRI for FHA loans set a new series high recording a jump of 2.3 percentage points to 27.6 percent in February.
First-time homebuyers are also increasing according to the study, which found that FTB volume by count rose 1 percent from last year. The study said that these elevated numbers for FHA loans and the rise in FHB volumes was due to “FHA and Fannie Mae’s outsized monthly risk increases,” which are “making entry-level homes less affordable, since in a seller’s market, prices rise faster than incomes as long as the marginal buyer, who sets the price for all, has access to higher leverage.”
Key Drivers for Increased FTB Mortgage Risk
The study found that a massive shift towards higher Debt-to-Income Ratios (DTIs) “after Fannie and Freddie increased their DTI limit to 50 percent without compensating factors,” was one of the key drivers of greater FTB mortgage risk. About a third of FTBs had a DTI in excess of their qualified mortgage limit of 43 percent.
Additionally, recent steps by the GSEs and regulators, along with a growing share of FTBs with little or no down payment, added fuel to the long-running housing boom. “With the house price boom nearing the six-year mark and accelerating, there is a new urgency to shrink the GSEs and FHA by administrative action,” said Edward Pinto, Co-Director of the AEI Center on Housing Markets and Finance. “This is the only way to stop leaning into the boom and end with unsustainable home prices.
FTB Mortgage Risk and Home Prices
The study also predicted that FTB mortgage risk was only going to increase as borrowers, especially first-time buyers were forced to take on more leverage to purchase a home, but measured steps could lead to moderating unsustainable home price increases.
“Even though it is often predicted, house prices are showing no signs of slowing down,” according to Tobias Peter, Senior Research Analyst at AEI’s Center of Housing Markets and Finance. “ This only adds to the urgency to reduce leverage during this cycle to rein in this unsustainable house price boom. The alternative is a longer boom and another very painful home price correction.”