Over the past couple of years, we’ve witnessed some volatility with regards to FHFA’s approach to mortgages on second homes and investor properties (sometimes referred to non-owner occupied housing or NOO). In January 2021, FHFA announced that caps would be imposed to limit the acquisitions of loans backed by second homes and investment properties to 7% of the total on a rolling 52-week basis. These caps were then suspended in September of that year.
Then, on January 5, 2022, FHFA announced targeted fee hikes on second home mortgages and jumbo mortgages on loans delivered to Fannie Mae and Freddie Mac, to be implemented on April 1, 2022. These up-front fees are tiered by LTV and for second home mortgages range from 1.125% and 3.875% and for high balance loans range from 0.25% and 0.75%. Borrowers in special affordability programs are excluded from these fees, as are first-time homebuyers in high-cost areas whose incomes fall below 100% of the area median income.
To see what if any impact these fee hikes have had on the targeted market segments, we look first at the share of conventional loans broken into second homes, investment homes and others, as measured by loan count.
On May 5, 2022, Freddie Mac announced "that certain principal curtailments were previously not passed through on a timely basis to MBS securities holders. 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.
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). Given the increasing policy focus on the provision of credit to these households, 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. 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.
While surging house prices continue to be the focus of market participants, the rental market is increasingly attracting the attention of policymakers, both because of the impact on inflation and the importance of this market for the economic wellbeing of lower-income households. In both cases, there is a widespread consensus regarding the need for new supply to ameliorate these problems. There are many factors that come into play regarding the construction of new rental units, including the availability of private and public sources of credit.
As part of its quarterly release of the "Financial Accounts of the United States", the Federal Reserve publishes data that allows us to break down the trend in total multifamily lending into major categories of credit risk holders:
The fourth quarter of 2021 marked the 13th anniversary of the introduction of the Federal Reserve’s Quantitative Easing (QE) policy, whereby the central bank worked to push longer-term rates lower once short-term rates hit the zero lower bound. This activity largely took place via purchases of longer-dated Treasury securities and mortgage-backed securities. There were many nuances as the central bank bought securities in different proportions over time and occasionally let their balance sheet shrink as the securities they held paid off or matured.
The purpose of this note is to take a big-picture view of the MBS market impact of a likely decline in Federal Reserve holdings in the Agency space as the central bank has recently indicated its intention to begin letting these securities run off its balance sheet. In particular, the FOMC statement of March 16 stated, “In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” Which we guess will be in May. What does this mean to valuations in the MBS market?
Our analysis is based on the data collected on Agency MBS ownership broken down by major investor class by the Federal Reserve in the Financial Accounts of the United States. This data is produced quarterly and is a broad measure of Agency securities, including not just single family Agency MBS but also Multifamily MBS and Agency Debt. Below find a chart of the progress of the Agency MBS market from Q4:2008, when the Fed launched QE, through Q4:2021. The chart nicely shows the ebb and flow of activity in this market on the part of the major players. The holdings controlled by the central bank is one example, starting at near-zero in Q4:2008 and cycling up and down, reaching a record high of almost 25% at the end of 2021.
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. 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.
A loan in trial modification plan (trial mod) can transit into the following state the next month:
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: