Based on the risk profile of the first-time homebuyers in March 2015, credit access is not as tight as is widely reported, but the loans are riskier, according to data released this week by the American Enterprise Institute (AEI)'s International Center on Housing Risk.
The March 2015 First-Time Buyer Mortgage Risk Index (FBMRI) released on Thursday found that first-time homebuyers with an Agency guarantee (FHA, VA, or Rural Housing Service) during the month had a median downpayment of just 3 percent, which equates to about $3,900, and a median FICO score of 705, slightly below the median of 713 for all individuals in the U.S. with a FICO score. For first-time buyers with an FHA-guaranteed loan, the median FICO score fell to 671.
“One hears practically every day that first-time buyers have limited access to mortgage debt,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk. “The FICO data show this isn’t true ― many borrowers with weak credit profiles are buying homes.”
Overall, the FBMRI stood at 15.14 percent for March, a series record and a year-over-year increase of 0.5 percentage points. The FBMRI for Agency mortgage loans is nearly six and a half percentage points higher than the mortgage risk index for repeat homebuyers.
The higher risk for first-time buyers can be attributed in large part to risk layering, according to AEI. In March, 68 percent of mortgages for first time buyers had a combined LTV of 95 percent of higher and 96 percent of those mortgages had a 30-year term. Because of the low down payment and slow amortization, it will take years for these buyers to gain a significant amount of equity in their house without substantial price appreciation, according to AEI.
Also, one-fifth of first-time buyers taking out mortgages had a FICO score lower than 660, which is the traditional definition of a subprime mortgage, according to AIE. One-quarter of first-time buyers had total debt-to-income ratios higher than 43 percent, which is the limit established by the Qualified Mortgage rule. Mortgages taken out by repeat homebuyers were less risky because they had a smaller share of buyers with FICO scores lower than 660 and a much smaller share with a combined LTV of 95 percent or higher.
These data that suggest credit is not as tight for first-time homebuyers stand in contrast to the National Association of Realtors (NAR)'s assertion that “interested homebuyers continue to find it challenging to obtain financing under tougher and more cautious credit standards.”
“The first-time buyer MRI hit a series high of 15.14 percent in March, moving deeper into the high risk loan category,” said Edward Pinto, co-director of the AEI's International Center on Housing Risk. “Notwithstanding this fact, the NAR and Urban Institute continue to call for the making of even riskier loans to first-time buyers, many of whom would be lower-income and minority buyers.”
Also released on Thursday, the March 2015 First-Time Buyer Mortgage Share Index found that first-time buyers accounted for 56.6 percent of government-guaranteed primary owner-occupied purchase mortgages, which was a slight year-over-year decline from 57.1 percent reported in March 2014.
“March’s results continue to show that first-time buyer volume and share remain strong, showing little variance beyond seasonal trends,” Pinto said. “This indicates the path to increased home building and home sales is stronger job and wage growth, not loosening of lending standards.”