Cyclical and secular factors are coming together to boost agency mortgage production. On the cyclical front, record low mortgage rates are the key driver of surging refi activity. Purchase activity is supported as well by low rates, but there are also indications that secular changes surrounding lifestyle choices sparked by the Covid-19 pandemic are leading homeowners to change residences away from the largest urban centers.
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:
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.
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.
The loan-level data releases we receive early each month contain delinquency data for Government programs such as FHA and VA, but no such information is provided by the GSE’s. However, late in the month data is provided for the reference loans in the Credit Risk Sharing (CRT) programs. However, data for the most recent month is only provided by the Freddie Mac Structured Agency Credit Risk (STACR) program as the comparable Fannie Mae data is released with a 1-month lag. The latest STACR data shows the 30day delinquency rate for Freddie CRT pools went up from 0.76% in April to 4.20% this month. The states with the highest delinquency rates are:
And the states with the lowest delinquency rates are:
The state rankings are broadly in line with those observed in the Government data. For example, the top three states in terms of 30-day dq’s for the FHA program are New York (14.4%), NJ (13.9%) and Puerto Rico (13.2%). In general, DQ’s for FHA are higher than those for the GSE’s due to the broader credit criteria available in Government programs.
Delinquencies are important in the CRT program because they have the potential to turn into losses shared with private investors. The forbearance programs will delay but not completely prevent this transmission. The ultimate extent of investor losses depends on the duration of the Covid-19 crisis, and ensuing policy actions.
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.
Previously we have noted the connection between aggregate unemployment and delinquencies in the mortgage market. 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, and the Census Bureau on population, we can correlate infection rates with mortgage delinquency rates.