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:
In previous posts, we discussed the trends in Ginnie Mae MBS issuance by loan purpose. Recall that the decision to buy a loan out of a Ginnie pool rests with the servicer. As such, this decision is dependent in part on environmental factors that impact the profitability of this action, notably the interest rate. As loans get bought out at par, there is a greater incentive to purchase loans out of pools and get them into reperforming status when rates are low than when they are high. This relationship can be clearly seen in the following graphs:
In a recent post, we discussed the utility of the FHA Performance dataset in tracking borrower stress in the housing market. 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. 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.
The rise in mortgage rates is having a profound impact on lender strategies in the mortgage market. These can be seen by looking at trends in the use of Third-Party Originators (TPOs). Some lenders, such as Quicken, traditionally work almost exclusively with loans originated in-house, while others, such as PennyMac, primarily accumulate and package loans produced by other lenders. Most larger institutions do some of both. The advantage of acquiring loans from a mortgage broker or correspondent in addition to origination is that the lender has flexibility regarding what method they use to turn volumes up and down to fit its strategy and market views. In both cases, there are costs to increasing and cutting capacity. As the market grows, bringing on new employees carries expenses such as training, while building trusted new external relationships can also be time-consuming. As markets contract, there are direct costs to layoffs, while unwinding networks can impact relationships that can be difficult to rebuild when the cycle turns. Of course, in a sufficiently bad market, the company may have no choice but to cut back.
Recently there have been some high-profile announcements of layoffs across the mortgage lending space, but through the first half of 2022, the reported decline in employment has been modest. But employment tends to lag interest rates, so further declines cannot be ruled out.
On May 25, 2022, Ginnie Mae announced that starting on June 8 it would enhance its pool and loan-level multifamily disclosures through the addition of an Affordable Status Field. This field marks every FHA loan in pools with a Ginnie Mae guarantee as:
We received this data on the 6th business evening, and below find some summary descriptions:
With the 30-year mortgage rate surging to a 13-year high near 5 ¼% and the FHFA purchase-only house price index at a record-high 19.42% in February (edging out the prior record of 19.39% in July 2021), we are in an unprecedented environment in the mortgage market. As such, it makes sense to update our analysis of the trend in issuance updated through April. Of particular interest in this regard are the FHA and VA programs.
Let’s start by looking at FHA. By loan count, there were 107,500 FHA loans issued in GNM pools in April, with a decline of over 1/3 from the same month a year earlier. One special interest is the evolution of the share of issuance by loan purpose:
In a recent post, we discussed findings obtained with the recent release of 2021 HMDA data. Among other things, we looked at the share of mortgage originations by income group and product type. In this note, we look at the difference in lending patterns between the banks and nonbanks.
The incentive behind this approach is policy driven. There is a long history of measures taken to encourage lenders and builders to foster economic development in low-income areas via the housing market. For example, the Community Reinvestment Act (CRA) stipulates that a bank’s performance with regards to compliance of their regulatory requirements depends in part on:
“the geographic distribution of loans—that is, the proportion of the bank's total loans made within its assessment area; how these loans are distributed among low-, moderate-, middle-, and upper income locations”
To assess this issue, we assign a flag to each of the census tracts designated by HUD as having a greater than 51% share of households with incomes in the Low-to-Moderate (LMI) range in the larger MSA the tract is part of, which are called LMI area by HUD, or “low income” tracts by FHFA. Below find a chart of the 10-year trend in the share of loans originated in this category by institution type for conventional and FHA loans: