The May 2015 First-Time Buyer Mortgage Risk Index (FBMRI) for agency loans reached a series record of 15.66 in May, an increase of half a percentage point from the previous three months and 1.1 percentage points from May 2014, according to data released Monday by the American Enterprise Institute (AEI)'s International Center on Housing Risk.
The FBMRI, which is an estimate of the share of first-time buyer mortgages that would default if they faced economic stress comparable to what was experienced in the 2007-08 financial crisis, is now 6.75 percentage points higher than the risk index for repeat homebuyers, according to AEI – and the gap has been widening.
Risk layering has largely been the cause of the higher risk on first-time buyer mortgages, according to AEI. About 71 percent of first-time buyer mortgages had a combined loan-to-value ratio of 95 percent or more, and 97 percent of first-time mortgage buyers had a term of 30 years.
"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 said. "In addition, more than one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages, and one-quarter had total debt-to-income ratios above 43 percent, the limit set by the Qualified Mortgage rule."
Repeat buyer mortgages are less risky than those taken out by first-time buyers due to the fact that a much smaller share of repeat buyer mortgages have a combined loan-to-value ratio higher than 95 percent, and a much smaller share of repeat buyers had FICO scores below 660.
The risk profile for first-time buyers suggests that access to mortgage credit is not as tight as some have suggested, according to AEI. In May, first-time buyers with an agency mortgage averaged a downpayment of about 3 percent, or $7,000, and a median FICO score of 706, which is below the median score of 713 for all mortgage buyers in the United States. The median FICO score for first-time buyers with FHA-backed loans drops to 673.
“Credit standards for first-time buyers are not tight,” said Edward Pinto, codirector of AEI's International Center on Housing Risk. “The widening risk gap between first-time and repeat buyers is reflective of a market reliant on first-time buyers who are themselves reliant on increasing leverage.”
Also according to the May report, first-time buyers made up 58.5 percent of primary owner-occupied government-guaranteed home purchase mortgages, a year-over-year increase of nearly 2 percentage points from 56.8 percent. The combined First-Time Buyer Mortgage Share Index (FBMSI), which measures the share of first-time buyers for both government-guaranteed and private sector mortgages, increased year-over-year from 51.2 percent in May 2014 to 52.7 percent in May 2015.
Meanwhile, the number of primary owner-occupied purchase mortgages that went to first-time buyers during the six-month period from December 1, 2014, to May 31, 2015, jumped by 12.5 percent over the previous six-month period, from 516,000 to 582,000, according to AEI.
“The Spring homebuying season is off to a strong start, buoyed by strong first-time buyer volume driven by increasing leverage and a strengthening job market,” said Pinto said.
“The data we publish are based on millions of loans,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “We have no doubt that these results paint an accurate picture of first-time buyers.”
To see the full May 2015 report from the AEI International Center on Housing Risk, click here.