With the release of 2019 HMDA data, we now have two years of loan-level information that contains both demographic and credit characteristics. Demographic information in HMDA includes income, race, and geography down to the census tract level, while credit characteristics include DTI. Our agency loan level databases contain a richer set of information regarding lending characteristics, but limited data on geography and demographics. For institutions looking to benchmark their performance in affordable and minority lending for regulatory purposes, 2019 HMDA, with data on thousands of lenders, is an invaluable tool. If you are interested in finding out more, please reach out.
There are of course policy uses for this data as well. A significant difference between HMDA and the agency pool loan-level data is that HMDA contains data for loans held on book, the so-called “Unsold” category. This allows a comparison of loans that banks originate and keep and those they deliver. We can break this down in any number of ways, but let’s look at it for conforming loans broken down by DTI.
In the table above, we can readily observe that banks tend to keep higher-quality loans (as measured by DTI<=43) compared to those they deliver to the Enterprises. Of course, this is not a complete picture of this issue; there are many other ways to slice the data (credit score, LTV, loan size, geography). Moreover, as there is a correlation between low LTV and desirable loan characteristics for regulatory purposes (minority status, low income), we cannot simply conclude that it’s a matter of keeping the best for themselves.
A second interesting question is: did behavior in this regard change between 2018 and 2019? Below you can find a chart of the change in the distribution between unsold and delivered loans between these two years.
It appears that banks kept more of the loans associated with very low levels of indebtedness (DTI<35) in 2019 compared to 2018, while they distributed a small share of higher-risk loans across the spectrum of DTIs above that level.
Explanations for such behavior are the subject of future research.
In a recent post, we pointed out an acceleration in the trend towards an increasing share of deliveries of purchase mortgages to the GSEs. This trend continued with the release of June data earlier this month, so a deeper dive is called for. First, the trend is far more evident for deliveries to Fannie Mae than Freddie Mac:
With the release of the GSE delivery data for May late last week we can start to see the impact of the Covid-19 crisis on the spectrum of loans delivered to Freddie Mac and Fannie Mae. First, deliveries of purchase mortgages have so far held up, with May deliveries up 3.5% from a year earlier. The notable development, however is the discrepancy between bank and nonbank deliveries, with Nonbank lenders in May delivering 30% more loans compared to a year earlier, while banks delivered 24% less.
In general, mortgage production has held up because mortgage rates are at record lows in the face of the economic crisis. The question is why they hold up better for nonbanks than banks. The bank data are more complicated to analyze than nonbank because banks have the option of holding loans on their balance sheets so a decline in deliveries may be due to an increase in loans retained rather than a drop in originations. Such a decline seems unlikely at present because banks have an incentive to sell loans that might go into forbearance because the two agencies charge the lenders substantially for such purchases. We have commented previously that banks are reducing loan balances but adding MBS to their balance sheets to reduce these risks. Another possibility is that banks are tightening lending standards due to concerns about rep and warrant issues if loans become delinquent. It is also possible that the virus has accelerated the trend to fintech lending, much like it has online shopping. There leaves many paths to investigate in future posts.
Mortgage lenders obtain loans through three channels 1) The retail channel through which they originate loans, 2) The wholesale channel through which they purchase loans that are originated by other financial institutions, and 3) the broker channel through which they acquire loans that are originated by the lender through an independent mortgage banker not affiliated with the originating institution. Channels from outside the selling institution are called Third Party Originations or TPO’s. Every month Fannie Mae and Freddie Mac report the selling institution of every loan delivered to them, and the channel by which the loan was obtained. Over the last couple of years there has been a notable rise in the share of the broker channel. This note looks at recent trends and looks for market segments in which these are most pronounced, with an emphasis on the broker channel. Table 1 shows the market shares of sales to the GSE’s by channel.
We previously noted that the recent surge in bank deposits, that is related to rising risk aversion associated with the onset of the Covid-19 crisis, serves to support bank investment in agency Mortgage Backed Securities (MBS). A look at recent Federal Reserve Board data reveals that growing MBS demand is not just the result of greater deposits, but also is due to a desire on the part of depository institutions to reduce risk in the mortgage space.
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 Freddie Mac, 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.