The increase in the number of cashout refis has led to some concerns about the implications for the quality of household balance sheets, similar to what occurred in the run-up to the Global Financial Crisis. At that time, many homeowners were tempted to use their houses as a “piggy bank” as the national savings rate hit all-time lows. In the runup to the Global Financial Crisis, the national savings rate hit a sixty-year low of 2.2% while over the 2016-2019 period the rate averaged a much healthier 7.6%.
It is useful to scale the magnitude of assets being cashed out and Freddie Mac releases a very useful file documenting this quarterly for their book of business back to 1994. In the fourth quarter of 2020, the amount cashed out reached $48.4 billion, about 58% of the $84.0 billion peak attained in the second quarter of 2006. As a share of household net worth, the most recent data point is 3.7%, well below the peak of 12.7% reached in Q2 2006.
It’s useful along these lines to ask about the credit profile of cashouts compared to other refinancings. Freddie Mac didn’t report cashout refi separately until 2008 Q3, but the following useful picture can be obtained.
In general, lenders tend to “lean against the wind” by loosening credit conditions when demand for credit declines, and vice versa. Interestingly, it appears that the share of noncashout loans follows a pattern in which the share rises when credit in general is tightened. At the present time, the average FICO score in March for noncashouts was a tight 764, vs 753 for cashouts. It is difficult to pin the rise in equity cashouts in the current cycle to loosening credit conditions.
Of course, the proof is in performance, and now that we have loan-level DQs for the GSE’s beginning last month, we can look at this broken down by loan purpose for the Freddie Mac book:
The performance of cashouts is mildly worse than that for noncashouts, but more in line with purchase mortgages. These statistics will bear watching in future months, particularly as forbearance programs begin to expire towards the end of the year.
Recursion and New View Advisors February 2021 expanded HECM reverse mortgage prepayment indices can be found here: New View Advisors Recursion Cohort Speeds 02_2021. The indices are derived from underlying HECM data in HMBS made public by Ginnie Mae, as well as private sources. This new expanded set of prepayment data is calculated using dollar principal balance, not unit count.
The enhanced data set shows current trends in prepayment activity by product type and Principal Limit Factors (PLFs), and for current 12-month LIBOR PLFs by Expected Rate. HECM loans with higher Expected Rates originated in the year or so prior to the precipitous fall in interest rates brought on by the pandemic are experiencing higher prepayment rates. Therefore, we segregate indices for recent production 12-month LIBOR PLFs into Expected Rates greater than 4% and Expected Rates less than or equal to 4%.
Prepayment speeds are expressed as annualized percentages in three categories: Total Payoffs, Payoffs Other Than Assignments, and Payoffs from Assignment. For each category, we calculate the 1-month, 3-month, 6-month and 12-month CPR, or annual rate of prepayment.
For HMBS pools backed by adjustable rate HECMs using the Constant Maturity Treasury (CMT) index, prepayment speeds will begin to populate as more of these HMBS are issued. Just under $300 million of CMT HMBS are currently outstanding: other than some highly seasoned tail pools, none have been outstanding more than one month.
Please contact us if you’re interested in customized stratification of HECM prepayment speeds by vintage, Expected Rate, Weighted Average Loan Age, or other tailored output.
On March 30, FHA released its Quarterly Report to Congress on FHA Single-Family Mutual Mortgage Insurance Fund Programs for Q4 2020. The report shows that the MMI fund grew to $82.3 billion from $79.9 billion the prior quarter. However, the year-to-date actual net loss rate on claim activity of 35.2% is higher than the projection of 30.1% percent, as the portfolio-level serious delinquency rate increased in the quarter to 11.9%, from 11.6% percent last quarter. Consequently, Secretary Fudge in a statement indicated stated that “Given the current FHA delinquency crisis and our duty to manage risks and the overall health of the fund, we have no near-term plans to change FHA’s mortgage insurance premium pricing.”
As we have noted previously, the Covid-19 crisis is very distinct from the Global Financial Crisis (GFC) insofar as while both periods experienced high delinquency rates, house prices now are soaring as opposed to collapsing in the earlier crisis.
In a recent post, we discussed the relative performance of loans with property inspection waivers vs those with traditional appraisals that qualified for a waiver. We commented that the observed out-performance of loans with waivers as measured by lower total delinquency rates (DQs) was likely influenced by relatively tighter lending standards (eg higher credit scores, lower DTI) for these loans compared to eligible loans that received a traditional waiver.
A fully rigorous examination of this issue would be an extensive undertaking outside the scope of these brief posts. But let’s do a quick example as a demonstration of what our tools can produce along these lines. To make for an apple-to-apple comparison, below find two grids containing the difference between the total delinquency rates for purchase loans with PIWs compared to those that are eligible but obtain a traditional appraisal. The first is for loans originated in 2019 and the second is for those originated in 2020:
We find that PIW’s are more extensively used in 2020 than in 2019. In addition, in 2019 the range of PIW takeup across cells was 8%-13%, while for 2020 it was 14%-28%. In both cases, takeup tends to rise with credit score. Lenders appear to be more willing to allow a waiver for borrowers with better credit.
For 2019, there are a number of outliers, but there is no clear pattern across the grid. Many lenders were just beginning to implement their waiver programs that year. By 2020, PIWs became a standard part of the toolkit. For most of the center of the grid, loans with waivers very slightly outperform those eligible loans using appraisals. Bigger outperformance can be seen, however, along the edges, i.e. loans with credit scores less than 720, and DTIs greater than 47. It appears it is not the waiver itself that leads to outperformance, but likely that underwriters are more careful and pay more attention in general to these riskier classes of loans.
Further work would look at performance across the largest servicers, and by state.
Recursion has met the criteria set by the M/WBE Program at the New York City Department of Small Business Services to be certified as a Minority Women-Owned Business Enterprise (M/WBE).
We have commented previously about housing and the “K-shaped Recovery” in which home prices are booming but rent increases are decelerating. This dichotomy is highly unusual but reflects the flight of households out of dense urban environments due to the Covid-19 pandemic. With rents decelerating, it is not surprising that starts of new multifamily units have been in a trend decline over the past year.
In a recent post, we discussed our comment letter to FHFA regarding policies and procedures related to property inspection wavers (PIWs). In that note we commented that one of the best ways to assess the impact of the program is to look at the performance of loans with appraisal waivers vs those eligible to obtain waivers but did not. At the time the note was posted (late February 2021) the loan-level data needed to perform such a calculation was not available, so we used a sample obtained from the reference loans in the pools used by the Fannie Mae Connecticut Avenue Security (CAS) Credit Risk Transfer (CRT) program.
Earlier this month we obtained the loan level DQ data for the books of the GSEs as of the end of February 2021 so a more comprehensive analysis is now possible. As stated in the comment letter, the eligibility rules to obtain a PIW vary by product type and agency, so to obtain an apples-to-apples comparison we need to look at the performance of loans with waivers against those that are eligible to use them but did not, as opposed to all loans. Since waivers are generally a recent development, we look at performance for loans originated in 2019 and 2020.
Debtwire quotes Recursion data showing a large uptick in LoanDepot’s Ginnie Mae portfolio over the month of February. In early reporting for March 2021, LoanDepot’s involuntary prepayment speed, or 1-month CDR, reached 20.6 percent.