​Assigning letters to economic recoveries (“V”, “L”, “U” etc.) has become a standard part of the economist’s toolkit for expressing a view on the nature of a particular forecast. The Covid-19 crisis has added a new letter to the lexicon, “K”. In a “K-shaped” recovery, some segment of the population experiences relatively strong growth, while others are left behind. Since housing tenure is an essential determinant of the distribution of household wealth, it is not surprising that we can clearly see this shape in the relative trends in house prices versus rents:

Data released last evening showed that total delinquencies for loans in Fannie Mae pools were unchanged in February at 3.6% in February, the first month that the rate did not decline since the Covid-19 Pandemic struck last spring. Notably, the same rate for Freddie Mac pools declined by 0.2% to 2.9%, the low reached since April 2020.

Our regular readers will be aware that an ongoing theme is the collapsing bank share of mortgage deliveries to the Agencies[1]. Our recent monthly download shows that the bank share of deliveries to the GSEs fell sharply again in December, collapsing by over 7.0%(!) from November to a record low 22.3%. A year earlier this figure stood at 41.7%. The plunge witnessed over the past year marked an acceleration in a long-term trend, as banks face a heavier regulatory burden relative to nonbanks, and as nonbanks have made inroads into the market through their development of superior technology interfaces with their clients. Covid-19 has served to accelerate this trend by pulling customers out of bank branches and putting them in front of their laptops and smart phones.

The latest drop incentivized us to dig a little deeper; we didn’t have to peer too deep to find an interesting result. Below finds a bank of the bank share of GSE deliveries, and the same chart excluding Wells Fargo and JP Morgan Chase.

For some time, we have been talking about the key driver of mortgage performance is policy rather than fundamentals. This theme is certainly evident with the release of agency prepayment data for November[1]. The chart below chart displays the gap between the 1M prepayment speeds between Ginnie Mae and GSE securities:

​We received complete GSE data for November late last week and as always there is a lot to churn on. Another record high of issuance was achieved, although this was entirely due to a surge in refi deliveries (+$16 Bln from October) while purchase deliveries declined slightly (-$7 Bln). Lack of supply and softer seasonal demand appear to be weighing on purchase volumes.

A long-term trend in these comments is the trend decline in the bank share of deliveries to the GSE’s[1]. We have commented that the Covid-19 pandemic has played to the natural technological advantage of nonbanks, while eroding the value of the bank branch networks, particularly for purchase mortgages.
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Interestingly, a little bit of a reverse trade can be seen the last couple of months, at least in purchase mortgages. The chart below looks at the bank share, graphed against the gap in the weighted average coupon between nonbanks and banks (“WAC Gap”).

There is a distinct correlation between these two series, although considerable noise is also apparent. Many factors drive market share including underwriting characteristics and product types, but the basic relationship comes across. In November, the gap in the WAC between Nonbanks and Banks increased by almost 4 basis points from October, which was attained by a 3 bp drop in the nonbank WAC being exceeded by a 7 bp drop in that of banks. In a market measured in tens of billions, a single bp has significance.
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The question going forward is whether the decline in the rates of banks’ offerings is supported by efficiency enhancements or simply reflects reduced profitability. The answer to this is key in determining the question of their long-term role in this market.

In a recent post we noted the recent striking rise in the GSE refinance share and commented that the rate of this activity in GNM programs, while still rising, has lagged[1]. This seems to be related to the tendency of capacity constrained lenders to provide credit to the highest quality borrowers, and to a looming 0.5% fee hike on GSE refinance deliveries scheduled for December 1.
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Focusing on FHA alone, the share of refinance loans compared to those delivered to the GSE’s has plummeted in recent months:

Unlike the situation during the Global Financial Crisis, imbalances in the housing market are not the root cause of the Covid-19 economic downturn. Instead, housing is helping to pull the economy out of its pandemic-induced swoon. House price rises have accelerated, due both to low interest rates, as well as to household relocations away from high-density areas. This is leading to increased construction, and improved household balance sheets. Moreover, a surge in refinances improves household cash flow. How long can this trend continue?
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The answer to this question depends crucially on many varied policy settings that influence lender and borrower behavior. The chart below shows 1-month CPR for 30-yr MBS securities broken down between the 30-Year GSEs and 30-Year FHA for the 2017cohort. A number of fundamental and policy factors come into play.