In a recent post, we discussed the disposition of loans that are exiting forbearance programs. In the Ginnie Mae programs, many loans bought out of pools have received modifications or other workouts, and then redelivered to Ginnie Mae pools. However, we have historically observed that there are more loans bought out than re-delivered, even considering the time needed for the workout. As it turns out, there are other market-based outlets for these loans, which is more evident at the issuer level than in aggregate.
Below find a chart of buyout and securitization activities within Ginnie Mae program for Lakeview, the third-largest Ginnie Mae servicer as of April 2022.
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. On January 25, Fannie Mae announced that they had purchased certain loans out of pools prior to the completion of the necessary trial payments. 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.
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.
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.
As a first step, we look at the impact of these purchases on CDR’s as the activity was clearly involuntary.
Agency-based Metrics for Assessing the Resolution of Mortgage Forbearance and Delinquencies (Part II – The GSE’s)
In a recent post, we discussed the utility of secondary market indicators to track the progression of loans that are coming out of forbearance in Government programs. This short note looks at this progression in the conforming loan market.
For the Ginnie Mae programs, issuers may buy loans out of pools after they are delinquent more than 90 days and begin a workout process that culminates in one of the options, including loan modification. The situation is quite a bit different for Fannie Mae and Freddie Mac. The main distinction is that on January 1, 2021, the GSEs extended their timeline for buying loans out of pools to 24 consecutive months of missed payments. As the Covid-19 pandemic began in March 2020, we expect to see buyouts being extended as much as to April and May this year.
However, we can obtain a view on future loan modifications through the trial mod flag in the borrower assistance plan field in the monthly disclosures the GSEs started to release in March, 2021. In order to obtain a permanent modification, borrowers must first successfully complete a three-month trial modification plan.
Below find the progression in the number of loans in such plans since March 2021:
In a recent post, we discussed the various factors behind the elevated pace of prepayments in Ginnie Mae securitized pools relative to those in conventional pools. A key driver of the difference in speeds is the different incentives facing Ginnie Mae program servicers regarding loan buyouts on one hand and those facing the GSE’s on the other. In the first case, the economics of the transaction are often favorable for servicers with cash available to purchase loans out of pools while the GSE’s take a more balanced view of the interests of servicers and investors.
The key regulation driving GSE behavior in this regard is the September 30, 2020 statements by the Enterprises extending the timeframe for delinquent loan buyouts from four consecutive months to twenty four consecutive months. While forbearance was not explicitly mentioned in these announcements, there is clearly a connection between this timeframe and that of the duration of the forbearance programs. For conventional loans that entered a plan prior to February 28 2021, borrowers have a maximum 18 months of forbearance available to them. Since the biggest share of loans in forbearance took place in Q2 2020, that 18 month period is running out for many. As borrowers work with their servicers to consider their options, loan buyouts should start to pick up in coming months as distressed borrowers pursue loan modifications or enter into foreclosure proceedings. In addition, distressed borrowers with equity in their homes may choose to sell their properties, leading to a pickup in voluntary prepayments.
As we approach year-end and the beginning of the process of phasing out forbearance programs, the natural question market participants are asking is which indicators should they be watching to gain a sense of the mortgage landscape in 2022. Along these lines, there is a significant difference between the Ginnie Mae programs and the GSE’s. In particular, for conforming loans, it is the Agencies themselves that buy nonperforming loans out of pools, while for FHA and VA, this function is performed by servicers. As the timeframe for buyouts on the part of the GSE’s was extended to 24 months earlier this year, we won’t see much activity prior to April 2022 on this front. So in this post, we focus on the Ginnie Mae programs.
As we have written previously, it is challenging to follow the path of a loan once it has been purchased out of a pool. At the aggregate level, we can view the activity of individual lenders using the FHA Neighborhood Watch data. In terms of the process, a nonperforming loan is bought out of a pool, and one of three actions can be taken. First, the borrower can be taken into foreclosure. Second, the borrower can become current and roll the unpaid balance into a second lien, in a process known as a partial claim. Third, the borrower can accept a loan modification.
In terms of the scale of buyouts, after an early spurt of activity in 2020 on the part of some parties, notably banks, the involuntary prepayment rate, measured by CDR(constant default rate), has settled down in recent months. FHA nonbank servicers have been more active in this space than other categories over the past year. As forbearance plans begin to expire towards the end of the year, these numbers may start to rise.
Recursion’s Chief Research Officer Richard Koss published an article in Housing Wire Magazine on agency mortgage forbearance and the capital markets. When the CARES act was originally passed on March 27, 2020, there were notable concerns that these measures would merely postpone an inevitable correction in the housing market once the programs expired. However, home price appreciation came to the rescue. But the mortgage market continues to face the prospect of involuntary buyouts of loans from agency pools. Check out the details at: