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. 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.
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?
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.
In a previous post, we noted that a key component of the implementation of unconventional monetary policy is the selection of coupons in its MBS purchase programs. As coupons in these securities occur only in steps of 0.5%, obtaining liquidity in new lower coupons is important in establishing a basis for mortgage rates to move lower. For example, 2.5% 30-year coupons were issued in 2013 and 2016, but never to the extent that liquidity was firmly established, limiting declines in the rate that borrowers paid at those times. This changed dramatically with the onset of the Covid-19 crisis. In March 2020 the Fed restarted its MBS purchase program after six years, including the 2.5% coupon, and this soon became the dominant coupon.
Since that time, the Fed has picked up its activity on this front. The GSE’s started issuing 2.0’s shortly after the crisis hit, and the Fed began buying them in May. Then 1.5% came on the scene this summer and this week sure enough the central bank validated this activity by adding them to their portfolios.
Can 1.0’s be far behind?
As we careen towards 2021, it’s getting to be time to look down from the top of the roller coaster towards the abyss below. The view is extremely hazy, but fortunately we have big data tools at our disposal to help clarify things. In mortgage space the single main question is what’s going to happen when forbearance expires. This program was designed to run out after a year, and that will be coming up starting next spring. If you are in forbearance and your time runs out, you have three choices:
Like all things related to mortgages, this is far more complicated than it appears. According to the Mortgage Bankers Association, 5.9% of mortgages are in a forbearance program. The NY Fed tells us that outstanding mortgages amount to about $10 trillion. So large numbers are involved.
The main market focus is on the distribution of outcomes when forbearance ends. This depends on a number of factors including the strength of the economy and the effectiveness of public health policy, as well as the financial condition of mortgage lenders and servicers. None of these are easy to predict.
We have posted numerous blogs about how Covid-19 has served to accelerate structural change in the mortgage market, particularly in the growing share of nonbank mortgage sales to the GSE’s. It’s natural in such an environment to look at deliveries by channel. As has been widely noted in the industry, the broker channel enjoyed a considerable increase in market share over the 2018-2019 period, as the broker community became better organized. Has this trend continued with the onset of the Covid-19 crisis?
In a recent post we looked at the agency composition of the recent surge in MBS production. We observed that Ginnie Mae’s market share in the three months to July 2020 is significantly below that experienced in the same period a year ago. The bulk of the decline is due to a drop in the refi share, while the purchase market share experienced less than a 1% decline. There are several drivers of share for purchase market share, including program design, the coupon spread between the government and conforming sectors, and differences in the credit boxes between the two. This note looks at competitiveness through the lens of the latter factor, credit boxes.
As noted in the prior post, Ginnie Mae is the securitizer for four different programs, with the two biggest being FHA and VA. VA has a fairly unique set of program requirements, so the main competition in the purchase mortgage space is between FHA and the GSEs. In the three months to July 2020 FHA lost about 2.5% of its share in the purchase mortgage space compared to the GSEs. Let’s dive into credit factors, starting with credit score: