On September 15, Recursion Data was cited in a story in Commercial Mortgage Alert that pointed out that Fannie Mae “has started to restrict the interest-only payment periods on debt backing properties built before 2000.” They cite Recursion data in pointing out that Fannie Mae purchased $4.2 bn in multifamily loans in August, bringing the year-to-date total to 35.3 billion, down 20% from the same period in 2022.
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Recursion is pleased to provide excellent support to all participants in this crucial segment of the commercial real estate market.

In a recent post, we discussed trends in the ownership of risk in the single family residential real estate market[1]. In this note, we round the picture out with an analysis of the commercial real estate market.

In recent posts, we discussed how some firms are implementing strategies to maintain origination volumes in Mortgage Winter. These include private securitizations and the use of buydowns. A more traditional approach would be direct market subsidies. The larger commercial banks have used various subsidy programs to assist low-income and first-time borrowers for some time, likely in compliance with their CRA obligations. More recently, some nonbanks have stepped up in this area, motivated by maintaining their volumes in a very challenging market.

The ball got rolling back in April when United Wholesale Mortgage (UWM) launched its Conventional One Program, where a borrower with 50 or lower AMI who puts 1% down receives a 2% grant from the bank up to $4,000. In June, Rocket Loans instituted its One+ Program, offering a similar deal but for borrowers with AMI at 80 or lower. Not to be outdone, in July, UWB broadened its program to include borrowers at 80 AMI or less.

We get a lot of requests at Recursion, the bulk of which never make it to these posts, but one that struck home recently was from a regulator who asked what we know about Lahaina. Given the scope of this tragedy, we thought it worth the effort to talk about what we do and don’t have. Specific to that location, the answer is relatively limited. The Agency disclosure data is provided at the state level. The population of Lahaina was 12,700 as of the 2020 Census, out of a population of the Island (County) of Maui of 164,000 and 1.4 million for the state of Hawaii overall. So, this level of detail seems unlikely to be sufficiently granular to provide a basis for analysis. However, it seems we can take a bottom-up approach that may yield something of value. This would be based on the HMDA data.
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HMDA data has the advantage of granularity down to the census tract level. Out of over 84,000 Census Tracts, we can identify 6 for Lahaina. We can then pull-down originations from HMDA:

​As we head into the end of summer, we note that the housing market remains locked into “Mortgage Winter”. Refinance activities are muted as mortgage rates are at a 22-year high. Even purchase mortgage applications are at the lowest level seen since 1995 as homeowners are not willing to give up their mortgages at historical low rates.  It’s not hard to imagine that in such a world we will see new behaviors as mortgage lenders struggle to remain viable. PennyMac stood out as one of the more creative lenders that was able to refinance the mortgages it services, indicated by the following chart:

We’ve written many, many times about the inexorable rise in the role of nonbanks in the mortgage market[1]. A variety of factors have contributed to these gains, including superior technology, a relatively less oppressive regulatory environment, and Covid-19 chasing people out of bank branches online. 
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This picture can be a little blurry, however, depending on the way you look at the market. There is, for example, the distinction between servicing book shares and origination shares. Our agency disclosure data doesn’t provide information on originators, but we can use “seller” as a proxy. The table below looks at the trends in outstanding portfolio and issuance for the conforming and Government markets over the period January 2022 – July 2023:

Back in April 2022, we asked the question: The Fed’s Holdings of MBS Holdings Will Decline, Who Will Buy?[1] The release of the Q1 2023 Z.1 data[2] gives us an opportunity to begin to formulate an answer.

In fact, the Fed’s share of holdings of MBS peaked at just under a quarter of the market in Q1 2022 (24.4%) and stood at just over one-fifth of the market in 2023Q1 (20.3%). Below find a table breaking this down by major purchaser.

There are two sectors that declined: the Fed and Banks, and two that rose: Money markets and households. There are a few comments below:
 
International Sector
The set of international investors in MBS is a complex web of public and private sector participants in developed and emerging markets. They are motivated to invest by a broad range of considerations ranging from short-term returns to currency stabilization. A lot of ink is spilled over these issues, but there is an interesting point to be made that their positions, in aggregate, are motivated to a reasonable first degree by the returns to be found in the market.

​Local stories matter, of course. China remains on a long-term path of decelerating growth, bordering on deflation, weighed down by debt and a slump in the real estate sector. The Yuan is near a 15-year low, and further easing measures could lead to additional currency weakness and associated trade tensions. 

In Japan, the Bank of Japan recently took another step in easing its Yield Curve Control policy that would allow the 10-yr JGB rate to rise. Market concerns are mounting that an acceleration in the yield could lead to widespread adverse market consequences globally, including MBS.

For all this, the share of the international sector rose by just over 1% over the last year.
 
Banks
In the previous post, we noted that the shares of bank and Fed holdings are positively correlated. This is because as the Fed sells securities, the funds used by the investors that purchase them often come out of bank deposits. That remains true, but per the table above, the decline in the bank share over the last year exceeded that of the central bank by about 2.6%:

The other factor responsible for the decline in the bank share is higher interest rates which act to draw funds out of depositories into private investment vehicles. Over the past year, the formula “Change in bank share = change in Fed share – change in money market & pension share” is accurate within 1%.
 
Private Investors
Most analysts, us included, have been looking for the private sector to pick up its MBS holdings as the Fed steps back. That has in fact occurred, but with an unexpected twist. Below find the shares of holdings over time for mutual funds and households[3]:

The share of MBS held in mutual funds has declined steadily since 2014, with no evidence yet that higher yields are attracting more funds into this sector. The striking result is a surge in ownership by the household sector, now accounting for over 12% of the total, the highest level attained since the GFC was raging, and the integrity of the banking sector was widely questioned.
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In June 2022, CPI inflation was reported at 8.9% yr/yr, the highest rate since 1981. Along with ChatGPT and the metaverse, our younger readers can learn a new term: coupon clip. It was all the rage in the early ‘80s, along with “Indiana Jones”. Wait long enough and everything comes back.

Overview
The release of the Financial Accounts of the United States (also known as the Z.1[1]) is always an opportunity to learn about important structural changes in the mortgage market. This is particularly the case in our current environment of high home prices and borrowing costs which we call “mortgage winter”. In this note, we focus on the breakdown on the ownership of risk for single family mortgages. This is not the share of ownership of MBS; it is who bears the credit risk for the loans.

Unsurprisingly, the growth in single-family mortgage credit outstanding in Q1 grew by the smallest amount in almost 7 years in the first quarter of 2023: