We’ve written before about curtailments, which are particularly interesting during times of rising interest rates when refinancings are at low levels[1]. We believe that investors and modelers would benefit from examining this aspect of borrower behavior. A good way to demonstrate this is to look at the home payment patterns of repeat homebuyers. In the recent environment of skyrocketing home prices, buyers of new homes have been confident about their ability to sell their current residence and have been more likely to purchase their new home before they pay off their old mortgage. If this story is true, we would expect to see significant curtailment activity within a few months of the purchase of a residence on the part of repeat buyers. In our previous note, we introduced the concept of a “Constant Curtailment Rate”, and implemented the calculation in Cohort Analyzer to quantify this effect:

On May 5, 2022, Freddie Mac announced "that certain principal curtailments were previously not passed through on a timely basis to MBS securities holders[1]. The outstanding principal curtailments will be reflected in the May 2022 factors and passed through to the affected MBS securities with the May 2022 payment. The curtailments are associated with approximately 178,000 mortgages distributed across approximately 50,000 pools. As a result of this catch-up pass through of principal curtailments, the May 2022 factors will reflect an approximately 0.7% CPR increase in prepayment speeds for the related pools, in the aggregate." In addition, they attached a list of 1,102 pools where the curtailment amount was equal to or exceeded 5% of the UPB[2].

That's a remarkable statement for a variety of reasons, but at Recursion, our immediate response was to take this as an analytical challenge. Do we have the information and tools needed to reproduce Freddie Mac's estimate of a 0.7% CPR increase from this remediation? How to begin? As the payment was adjusted in May factors, it would have impacted April CPR. But how to back out curtailments? It's clear that this would have to be done at the loan level since there is not enough information at the pool level to compute a shortfall.

Back in 2021, we wrote a comment on the properties of the GSE Special Eligibility Programs designed to provide lower income households with access to mortgages (HomeReady for Fannie Mae and Home Possible for Freddie Mac)[1]. Given the increasing policy focus on the provision of credit to these households[2], it is appropriate for investors to look at the investment opportunities in this area. In this note, we look at the performance of HomeReady/Home Possible Program loans (referred as Low-Income Program in the following) vs. non-special-eligibility program loans, as measured by one month CPR, controlling coupon and vintage. We focus on just two such cohorts, 1.5% and 2.0% coupon pools of 2021 vintage. By loan count, the share of Low-Income Program loans in these pools by agency for May 2022 is:

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.

​Over the past six months, prepayment speeds of Ginnie Mae securities have notably widened against those of the GSEs.

One of the many recurring themes of these posts is that the shock of the Covid-19 Pandemic and subsequent policy response has resulted in structural changes in behavior that cause loan performance metrics to shift compared to the pre-crisis world. An interesting example of this can be found in the performance of modified loans in Ginnie Mae programs.

Modified loans in these programs are those that have been purchased out of pools by servicers that are past due that subsequently have features such as rate and term adjusted in order to bring households back to a current status. These are then often resecuritized into a new GNM pool.
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• Securitization of modified loan volumes more than doubled after the pandemic

The Covid shock of course has resulted in a surge in delinquencies and triggered large volumes of buyouts and modifications. Below find a plot of the share of modified loans of total new issuance for FHA and VA programs since January 2020:

​Our proprietary matching algorithm continues to chug along and our match rates between the Agency loan tapes and HMDA continue to improve. Here is an up-to-date summary table: