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Why Are Agency First-Time Buyer Mortgages Getting Riskier?

seal-on-moneyAgency first-time buyer loans were significantly more at risk of default in December 2015 than they were over the previous December, according to the Agency First-time Buyer Mortgage Risk Index (FBMRI) for December 2015 released Tuesday by the AEI International Center on Housing Risk.

In December 2015, the FBMRI was reported at 15.8 percent, which was nearly a full percentage point higher than December 2014 (14.9 percent). Meanwhile, the Agency FBMRI for December 2015 was 6 percentage points higher than the index for repeat homebuyers and has been widening, according to AEI.

The number of first-time buyer loans that were high risk also moved upward year-over-year from 51 percent in December 2014 up to 54 percent in December 2015.

The main driver for the increase in default risk for first-time buyers has been risk layering, according to AEI. In December 2015, 70 percent of first-time buyer mortgages had a combined LTV ratio of 95 percent or higher while 97 percent of them had a 30-year term. Also, more than one-fifth of first-time buyers had a FICO score below 660, which fits the traditional definition of a subprime mortgage.

1-19 AEI graph

“Given the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially,” the report stated.

By comparison, the share of repeat buyers with a CLTV of 95 percent or higher was much smaller than the share of first-time buyers; likewise for the share of repeat buyers with a FICO score lower than 660.

“December marks the 21st straight month the Agency FBMRI has increased on a year-over-year basis,” said Edward Pinto, codirector of the AEI International Center on Housing Risk. “The gap between first-time buyer and repeat buyer mortgage risk levels now stands at 5.92 percentage points compared to 4.91 and 4.64 percentage points in December 2014 and 2013, respectively. The increase in first-time buyer leverage is facilitating outsized home price increases relative to incomes.”

Meanwhile, home prices are rising at a faster rate than household incomes due to a number of factors, including historically low mortgage rates (which began the year at below 4 percent), an improving labor market, and a seller’s market for existing homes that is 39 months long and counting. Despite this, the Agency First-time Buyer Mortgage Share Index (FBMSI) rose year-over-year by more than a full percentage point in December 2015 from 55.5 percent up to 56.7 percent, meaning that first-time buyers accounted for 56.7 percent of primary owner-occupied home purchase mortgages with a government guarantee. This translated to approximately a 10 percent increase in the number of primary owner-occupied purchase mortgages for first-time buyers, up from 113,000 to 124,000, according to AEI.

The Combined FBMSI, which includes both government-guaranteed and private sector mortgage loans, also rose by a full percentage point year-over-year in December 2015 from 50.2 percent up to 51.2 percent.

1-19 AEI graph 2


About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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