In a recent post, we posed the question: as the Fed’s portfolio shrinks, who will buy[1]? In this report, we dig a bit deeper and look at the differential market impacts based on whether the loans on the balance sheet roll off (as in, for example, a refinance transaction) or are sold off.

In the first case, we assume that a mortgage in a pool the Fed holds is extinguished, and a new mortgage is created through a refinance transaction, or via a home sale followed by the purchase of a new home financed by a new purchase mortgage, or through a buyout that generates a new modified loan. This case describes the situation described in the earlier post: a mortgage on the Fed’s balance sheet disappears, and some other investor has to pick up the new loan. The question here is how much higher the yield on the new pools has to be to attract sufficient demand from private investors. These new loans tend to have characteristics that investors find attractive, including a coupon which is near the most liquid part of the market (the current coupon).

The second case is quite different. In this instance, the question is how much higher the yield has to be (lower price) for the existing mortgages being sold to find buyers, not for a new mortgage with the most desirable characteristics. In this case, it’s not just a matter of who has the capacity to increase their holdings, but how much additional yield investors will be required for characteristics that are less than pristine. These are challenging issues that we can’t offer precise solutions to, but one way to approach the issue is to see how different the Fed’s portfolio looks from those held in the private sector.

To conduct this exercise, we look at two characteristics. The first is the coupon distribution of what the Fed holds vs. the portfolios held by private investors. This rather technical exercise can be conducted by supplementing the data provided in the Agency disclosures contained in our Pool-level Analyzer with the central bank’s holdings provided by the New York Fed[2]. In fact, the distinction is quite notable for 30-year fixed-rate mortgage pools:

In an earlier post, we discussed the use of trial modifications as a leading indicator of buyouts, as loans in these programs must experience three months of successful payments prior to being eligible for a permanent mod[1]. On January 25, Fannie Mae announced that they had purchased certain loans out of pools prior to the completion of the necessary trial payments.[2] Then, on March 25, Fannie published a list of these securities, allowing us to quantify the impact of this event on the performance of their pools[3].

The spreadsheet attached to the March announcement contains over 17,800 entries dating back to February 2021 and states that the total unpaid balance bought out early amounted to over $4.5 billion.
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The point of this post is to assess the magnitude of this activity on Fannie Mae’s prepayment speeds. To address this question, we imported the data in the file released by Fannie Mae into our Recursion Pool Analyzer.
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As a first step, we look at the impact of these purchases on CDR’s as the activity was clearly involuntary.

With the expiration of forbearance programs underway, there is an interesting question about how loans exiting these programs will perform once they are resecuritized. For Ginnie Mae programs, these are either loans that exit forbearance with a partial claim or receive a permanent mod under the various waterfall options in the FHA or VA programs. In our previous blogs[1], we have noted MOD and RG loans are becoming a significant portion of loans delivered to newly issued Ginnie Mae pools.

In a recent post, we mentioned that the 24-month timeline for the purchase of delinquent loans out of pools implied that this activity would not pick up until April 2020[1]. However, some leading indicator of loan disposition was available through the release of trial modification data in the Borrower Assistance Plan (BAP) field released in the monthly Agency disclosures. Once loans have completed three months of successful payments in this plan, they are eligible to be purchased out for the commencement of a permanent modification, and eventual resecuritization.
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A loan in trial modification plan (trial mod) can transit into the following state the next month:

1. Mortgagor payoff: this is an unlikely outcome, as loans in trial mod are troubled loans.
2. Repurchase: Being repurchased out of the pool --- this typically should not happen after giving the loan 3 months in the trial.
3. Forbearance: also unlikely, most loans in trial mod should have used forbearance plan already.
4. Trial Period Plan: loans in trial mod for just 1 or 2 months should stay in trial mod for a least another month.
5. No Plan: trial mod terminated however did not result in a repurchase immediately.
6. Other or N/A: status not available.

The number of loans in these programs continues to grow, standing at 37,957 in February 2022, with a balance of about $8.3 billion, up from 9,911 and $2.1 billion in March 2021. The evolution of the disposition of loans is shown in the following chart: