As the economy slows and the impact of inflation weighs on many households, we have noted signs of distress in mortgage performance in parts of the market despite the resilience observed in the labor market. Another corner of the market that is drawing attention is reverse mortgages. The metric used to assess performance in this space is the number of mandatory purchase events. Unlike the situation in the forward mortgage market, these occur not when the borrower faces financial distress, but when the servicer is compelled to purchase a loan out of a pool once the balance reaches 98% of a pre-set amount -- the “Maximum Claim Amount (MCA)”. This amount is capped so as to reduce the risk of the loan amount surpassing the valuation of the collateral. The fundamental factor driving this event is interest rates as HECMs are floating-rate loans, and a higher rate brings the loan balance up faster.
Recursion’s HECM Analyzer tool allows us to quantify the number of prepayments that are due to this factor, both in absolute dollar amount and as a share of total prepayments.
A Bottom-Up Methodology to Computing the Size of the Agency Single-Family and Multi-Family CMO Market
Recursion has undertaken an intensive effort to compute the size of the Agency CMO market back to 2000. The size of the Agency CMO market is calculated by building up from the loan level. This data is provided by agency disclosure of the portfolio of each collateral group and collected from text files, pdfs, and other formats across single-family and multifamily CMOs. The formats of the disclosure files differed across agencies and changed over time, presenting a challenge to unify.
The inconsistent data quality posed another challenge. The single metric we used to assess quality was assets = liabilities. The existence of Re-Remics and IOs introduced overcounting, which we eliminated using an algorithm that closed the asset-liability gap, with the remaining portion largely explained by over-collateralization. In the end, we were able to construct a direct relationship with all single-family and multifamily CMOs and the loans backing them up via the “exploded method”.
We performed these calculations by agency for both single-family and multifamily loans on a monthly basis. Below find bar charts of the progression of the single and multifamily CMO markets back to 2000 on a year-end basis. The single-family CMOs for the three agencies are fairly homogenous. For multifamily CMOs, we include the CMOs collateralized by Ginnie Mae multifamily pools backed by Ginnie construction loans and project loans. For Fannie Mae, we include Fannie Mae GeMS (CMO deals backed by Fannie DUS pools), and for Freddie Mac, we include all Freddie K deals-- classifying them as 100% CMO due to their structure.
For some time, we have been following the trends in appraisal waiver usage for loans delivered to the GSEs. Now it’s interesting to revisit these trends in the wake of the recent sharp volatility in economic and market conditions. Appraisal waiver usage by originators is one of a number of decisions that reflect the risk appetite of loan-producing firms. All else being equal, a waiver serves to reduce costs, and potentially volumes, at a cost of increased uncertainty about a property’s valuation. As the mortgage market is currently dominated by purchase mortgages in this high interest rate environment, we limit our analysis to this loan purpose.
The risk aspect can be clearly seen by the tendency for waivers to be more widely available for borrowers with strong credit profiles: