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[1]. 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[2]. 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[1]. Subsequently, we looked at the impact of this situation on individual market participants[2]. 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.
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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[1]. 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.
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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.
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Again, more market participants are turning to Recursion to obtain the most up-to-date insights into mortgage market trends.

The article can be found here. (Subscription may be required)

For more information, please reach out to inquiry@recursionco.com.

In a recent post, we discussed the utility of the FHA Performance dataset in tracking borrower stress in the housing market[1]. Here we look at other interesting market perspectives that can be obtained from this release.

First, we look at property type. This breakdown is not available in the GNM loan-level disclosures, so this is a new view. Here we have 30-day DQ rates broken down over five categories:

We recently wrote about the increase in short-dated delinquencies in FHA pools relative to loans in conforming pools[1]. We took this as a sign of the disproportionate impact that inflation has on lower-income households. This is a useful observation, but it is limited by the lack of visibility on delinquencies of three-month duration or longer as these loans are often bought out of pools. To address this gap, we recently imported the FHA performance data. This data is not available at the loan level, but the aggregate characteristics are informative.