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[1], 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[2], reflecting the big hit caused by the pandemic. 
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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.

Previously we have noted the connection between aggregate unemployment and delinquencies in the mortgage market[1]. With the release of state-wide delinquencies for FHA loans earlier this month, we can dig deeper into the connection between mortgage distress and the Covid-19 crisis. Based on data released by the Covid Tracking Project[2], and the Census Bureau on population, we can correlate infection rates with mortgage delinquency rates.

​April mortgage deliveries by the agencies Fannie Mae, Freddie Mac and Ginnie Mae showed a rise in deliveries of mortgages to the two agencies for both home purchases and refinances. Purchase mortgage volumes reflect a normal seasonal pattern, while refinances experienced a sharp spike upwards in response to low levels of interest rates. Given normal (and possibly growing) lags related to closing times, many of these contracts were signed in March when rates had already dropped sharply but the full impact of the Covid-19 virus on stay-at-home policies was not yet fully felt.

Overview

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[1], 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[2].
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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[3]. To understand the behavior of banks in this market it is important to probe its underlying structure.

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[1]. 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 Ginnie Mae, 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[2].

Late on the sixth business-day of every month, Ginnie Mae releases its updated loan tape that allows us to calculate the delinquency rates for its book of mortgages. We received the most recent tape this week, reflecting the mortgage payment activities in March. As most payments are due in the first half of the month, we did not expect to see a very large impact as the scale of the crisis was not fully recognized until the second half of the month. To check for traces of such an impact, we looked at short-term (30day) delinquencies (DQ’s) for loans serviced by nonbanks in the FHA program. We chose FHA because this program tends to support lower-income households, which are more likely to be impacted by the virus. We chose nonbanks because they tend to have somewhat looser lending standards than banks, and consequently higher delinquency rates.