On November 30, 2023, the Veterans Administration (VA) announced a new home retention program called the VA Servicing Purchase (VASP) program as an option for borrowers who cannot be assisted through other home retention options. As the program will not be rolled out until March 2024, VA has strongly encouraged a foreclosure moratorium on all VA-guaranteed loans through May 31, 2024. Under this program, VA will exercise its statutory option to purchase the loan from the servicer and VA will hold the loan in VA's own loan portfolio. The servicer will prepare a modification of the loan to increase affordability for the Veteran.
As the vast majority of VA mortgages are securitized in Ginnie Mae pools, let’s first take a look at the outstanding balance and loan count of VA loans using data disclosed by Ginnie Mae:
Since the end of last year, the Government Sponsored Enterprises have released so-called “Social Score” Indexes that are made to appeal to ESG investors. Both Fannie Mae and Freddie Mac produce scores at the pool level based on a variety of social metrics. The following methodology summary comes from Fannie Mae (Freddie Mac has adopted the same methodology as Fannie Mae’s):
With all eyes on the turmoil in the banking sector, it’s good to see that policymakers continue to innovate to help borrowers. Earlier this month, HUD published Mortgagee Letter 2023-06 “Establishment of the 40-Year Loan Modification Loss Mitigation Option”, which establishes the 40-year standalone Loan Modification into FHA’s COVID-19 Loss Mitigation policies. The standalone 40-yr mod is scheduled to be implemented by May 8. This follows the establishment of a 40-yr modification with a partial claim in April 2022. The introduction of standalone 40-yr mods reminded us that we haven’t focused on the progress of the 40-year mod with a partial claim identified by pool prefix “ET”. Below find a chart of issuance by program:
In recent posts, we introduced the phrase “Mortgage Winter” to describe the current environment where high-interest rates and elevated home prices lead to a severe drop in transaction volumes. Subsequently, we looked at the impact of this situation on individual market participants. The bulk of market participants across the mortgage ecosystem is experiencing year/year revenue declines of two-thirds or more. These entities are having to adjust their business models to this situation and develop strategies to navigate the uncertain environment ahead.
Spring will come, but whether the ensuing rebound will be sufficient to return the sector to a state of financial health is a question that remains far from assured. There is also another factor to consider besides revenue, and that is the potential for increased servicing costs associated with delinquent borrowers.
Growing concerns about a looming recession combined with increasing signs of distress in Government mortgage programs, particularly FHA, are leading many market participants to step up their focus on GSE buyouts. These found a recent peak last winter as forbearance programs unwound and have been in a generally declining trend since that time.
For some time, we have been following the trends in appraisal waiver usage for loans delivered to the GSEs. Now it’s interesting to revisit these trends in the wake of the recent sharp volatility in economic and market conditions. Appraisal waiver usage by originators is one of a number of decisions that reflect the risk appetite of loan-producing firms. All else being equal, a waiver serves to reduce costs, and potentially volumes, at a cost of increased uncertainty about a property’s valuation. As the mortgage market is currently dominated by purchase mortgages in this high interest rate environment, we limit our analysis to this loan purpose.
The risk aspect can be clearly seen by the tendency for waivers to be more widely available for borrowers with strong credit profiles:
As policy interest rates continue to rise and economic activity begins to slow, attention in the mortgage market shifts towards concerns about the potential for borrower distress. We are early in this process as the labor market continues to add jobs, and there continue to be more job openings than people looking for work. Nonetheless, signs of strain begin to be seen, and it's worthwhile to point out early trends and consider implications.
Notably, the impact of Hurricane Ian could be seen in the short-term delinquency data:
Recursion analysis of trends in short-term delinquencies of Ginnie Mae programs was highlighted in a recent article in National Mortgage News entitled "High-risk defaults could be 'canary in the coal mine' for mortgage market".
"The rate of early payment defaults — defined as at least two missed payments within the first six months of a mortgage — has doubled during the past year for borrowers of Federal Housing Administration-backed loans, according to data from the mortgage-analytics firm Recursion."
The article goes on to quote our analysis that this trend is notable for lower credit score articles in the FHA program. This has occurred in a period of robust job market, raising the issue that delinquencies may rise further if the recent hike in interest rates by the Federal Reserve results in stalled growth or a recession.
Again, more market participants are turning to Recursion to obtain the most up-to-date insights into mortgage market trends.