According to Fannie Mae, a limited cashout refi loan is a mortgage that meets a variety of criteria and which restrictswith restriction of the amount the borrower can withdraw to not more than the lesser of 2% of the new refinance loan amount or $2,000. In addition, the funds must be utilized only for specific purposes including the payment of closing costs. As the GSE’s have never made a limited cashout flag available in its loan level files, we have never been able to look at the properties of these transactions.
It turns out however, that we can back into identifying some of these loans through the use of the Property Inspection Waver (PIW) flag. As we noted in a recent post, Fannie Mae sets a different standard for obtaining a PIW for a limited cashout refi than for other cashout refis. In fact, the criteria for a limited cashout is the same for a non-cashout refi.
Limited cashout refinance allows borrowers to attain more favorable mortgage terms, and receive a limited amount of money back at closing.
In a previous post, we mentioned that Fannie Mae has a specific Property Inspection Waiver (PIW) eligibility rule for limited cashout loans, while Freddie Mac makes no such distinction . Compared with regular cashout refis, limited cashout refis have a lower LTV/CLTV requirement for PIW. For example, to be eligible, a limited cashout refi loan can have up to 90% LTV/CLTV comparing to up to 70% for a regular cashout refi loan, if the property is a primary residence or a second home. For investment properties, the LTV/CLTV requirement for a limited cashout refi is less than or equal than 75% while that for a regular cashout refi is 60%.
The release of the Ginnie Mae loan-level forbearance data earlier this week enabled us to see the impact of the Covid-19 crisis on forbearance.
An immediate question is how this data relates to delinquency. We have commented previously that forbearance and delinquency are distinct concepts as borrowers may choose to enroll in a forbearance program as an option to stop paying their mortgage on short notice in the future. The pool level data released earlier this month by the GSE’s is not of high quality and showed forbearance rates less than those released from other sources.
The Ginnie Mae loan level data appears to be very accurate, and in synch with other reports. Within the category of forbearance loans, 27.9% of Covid related are still paying. The portion for not Covid related is 15.5%. This result provides confirmation that a significant portion of borrowers have availed themselves of the option to stop paying without exercising it yet.
Appraisals play an important role in managing the risks associated with residential mortgages. Since 2017, both Fannie Mae and Freddie Mac (GSEs) have published multiple rules (see Appendix below) for lenders to qualify mortgage applications for property inspection waivers (PIW). PIW can reduce the cost of mortgage transactions. However, PIW raised concerns of improper usage among investors, mortgage insurers, regulators and other players in the mortgage market. In particular, research has shown that loans with PIWs prepay much faster than loans without.
In March 2020, both Fannie Mae and Freddie Mac released loan level information regarding “Property Valuation Method” which included the Appraisal Waiver information. The new data regarding PIW’s offers the opportunity to study how this program affects the market.
We received loan-level forbearance data from Ginnie Mae for May earlier today. The data are of high quality and appear to be broadly in line with the data reported by the Mortgage Bankers Association for the month of a little over 11% (no breakdown by program is given). The data appear to be a much better representation of market conditions than the pool-level data released by the GSE’s earlier in the month.
As this data is on the loan level, we can look at the relationship between this and delinquency data by state level geography and other characteristics such as bank/nonbank and underwriting characteristics and we will provide some analysis of this sort in upcoming posts.
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.
As stay-at-home orders commenced in most of states during the Covid-19 pandemic, home sales have been heavily impacted. A good timely indicator of home sales is Redfin pending sales. Monthly average seven-days total pending sales, which measure the number of total homes that went under contract in the prior seven days, show normal home sales seasonal patterns from Jan 2019 to Feb 2020. However, the number suddenly declined about 14% from 42,978 in Mar 2020 to 36,794 in Apr 2020, reflecting the big hit caused by the pandemic.
What will MBS issuance look like in the near future? Using our powerful data analytics tool Cohort Analyzer, we easily summarized the Agency (GNM, FNM, FHL) MBS Issuance for home purchases from Jan. 2019 to May 2020(month to date as of the 15th business day of the month). The chart below shows the clear leading relationship between pending sales and over MBS purchase issurance. Thus, we can expect that the decline we observed in pending sales in April is likely to show somewhat softer MBS purchase issurance in the early summer. Continued record-low interest rates, perhaps combined with gradual reopening in some states, should we help to support purchase issuance as the summer progresses. However, given the uncertainty surrounding the reopening process, it is still to early to be confident that the impact of the Covid-19 virus on the housing market and purchase mortgage production has formed a bottom.
 The number excludes homes that were on the market longer than 90 days.
 Data provided by Redfin, a national real estate brokerage.