With the onset of the Covid-19 crisis, the role of the banking sector has once again risen to the forefront of concern. As noted in an earlier post, the sharp spike in unemployment is certain to lead to a surge in delinquencies. Banks play a significant role in the mortgage pipeline as originator, servicer and investor. In our previous post, we noted that the onset of the crisis has triggered a flood of cash flowing into bank deposits as households and others shed risky assets. As such, banks have more assets to invest, including in the mortgage market.
Banks like mortgages as an investment, spurred by solid fundamentals related to firm labor markets and rising, but not overly stretched home prices. Banks are protected from credit and default risk by owning agency MBS instead of mortgage whole loans and enjoy favorable treatment from the capital rules set by the regulators. According to Federal Reserve data, in Q4 2019 banks held about 25% of the $9.6 trillion agency MBS market. To understand the behavior of banks in this market it is important to probe its underlying structure.
With the onset of the Covid-19 crisis, the role of the banking sector has once again risen to the forefront of concern. As noted in an earlier post the sharp spike in unemployment is certain to lead to a surge in delinquencies. Substantial purchases by the Federal Reserve of Mortgage Backed Securities (MBS) have had a limited impact on rates facing borrowers due in part to uncertainty around the magnitude of the losses and who will bear the costs. Policies regarding forbearance and liquidity provision to mortgage servicers are having an impact on lending standards and the availability of credit.
Banks play a significant role in the mortgage pipeline as originator, servicer and investor. Most of the current focus is on the first two, but the importance of their role as investor is also crucial. According to Home Mortgage Disclosure Act (HMDA) data Recursion uploaded to the cloud, 3.1 million individual single family loans with a balance of $739.4 billion were originated in 2018 by the banks, of which 60.4% were held on their balance sheet. Each loan file in the data set contains many characteristics, including originator information. As banks originated about 43% of all mortgages that year, the implication is that about one quarter or all residential mortgage production was kept by the banks.
With the CARES (Coronavirus Aid Relief and Economic Security) Act offering forbearance to households with mortgages for up to a year, the onus of payments to mortgage investors falls on the mortgage servicers. Much concern has arisen about the ability of these institutions, particularly thinly capitalized nonbank servicers, to meet these obligations. In the case of Ginnie Mae servicers, the PTAP (Pass-Through Assistance Program) was rolled out to provide a line of credit to servicers in Government programs, notably FHA (Federal Housing Administration) and Veterans Administration (VA). In the case of the GSE’s, no such program has been forthcoming and instead, FHFA (Federal Housing Finance Agency) the regulator of the Government Sponsored Enterprises, Fannie Mae and Ginnie Mae, announced that servicers of loans insured by these enterprises is only required to pay investors for the first four months if a loan is in forbearance.
The Covid-19 Virus has clearly had a devastating impact on the jobs market in the US. Over the past four weeks, over 22 million people have filed for unemployment claims. This number has grabbed the headlines, but to get a more accurate sense of perspective on the problem it is best to look not at new claims, but instead at the stock of people who are receiving benefits, and then scale this by the size of the labor force. This concept is referred to as the “insured unemployment rate”, which was first reported in 1971. This figure reached an all-time high of 8.2% in the week ending April 4, greater than the peak during the global financial crisis of about 5% and the all-time peak near 7% in the mid-1970’s.
A reverse mortgage is a mortgage loan backed by a residential property, that allows the borrower to access the unencumbered equity in their home without making monthly payments. The loans are usually offered to senior homeowners. Currently, FHA has endorsed reverse mortgage loans an outstanding balance of 54 billion USD and these are securitized in Ginnie Mae’s HECM pools. This program is available for people age 62 and over.
There are many differences between reverse mortgages and regular (forward) mortgages, particularly that the balance of reverse mortgages tends to grow over time as interest accrues and sometimes payments are made to the homeowner. But in both cases investors face prepayment risk. The HECM loan tape disclosed monthly by Ginnie Mae provides data by many characteristics, including reason for prepayment and the age of the borrower.
Late on the sixth business-day of every month, Ginnie Mae releases its updated loan tape that allows us to calculate the delinquency rates for its book of mortgages. We received the most recent tape this week, reflecting the mortgage payment activities in March. As most payments are due in the first half of the month, we did not expect to see a very large impact as the scale of the crisis was not fully recognized until the second half of the month. To check for traces of such an impact, we looked at short-term (30day) delinquencies (DQ’s) for loans serviced by nonbanks in the FHA program. We chose FHA because this program tends to support lower-income households, which are more likely to be impacted by the virus. We chose nonbanks because they tend to have somewhat looser lending standards than banks, and consequently higher delinquency rates.
On April 7, 2020 our CEO Li Chang was invited to speak as an industry expert at a graduate-level finance class at the Gabelli School of Business at Fordham University. Students were also given free access to the Recursion Analyzers to help them monitor the current mortgage market trend using big data tools.
Students were introduced to the problem of understanding the role of new mortgage fintech lending based on the use of loan-level data on U.S. mortgage applications and originations reported to their regulators according to the Home Mortgage Disclosure Act (HMDA).