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.
With the expiration of forbearance programs underway, there is an interesting question about how loans exiting these programs will perform once they are resecuritized. For Ginnie Mae programs, these are either loans that exit forbearance with a partial claim or receive a permanent mod under the various waterfall options in the FHA or VA programs. In our previous blogs, we have noted MOD and RG loans are becoming a significant portion of loans delivered to newly issued Ginnie Mae pools.
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:
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:
Agency-based Metrics for Assessing the Resolution of Mortgage Forbearance and Delinquencies (Part I– Government Programs)
In a fine recent paper, the Federal Reserve Bank of Philadelphia “highlights the immediacy of the challenges facing mortgage servicers and policymakers” that arise from the resolution of mortgage forbearance and delinquencies. As of the time of writing, the Philly Fed stated that “some 2.73 million mortgages are either in forbearance or past due; about 0.78 million of those are in Coronavirus Aid, Relief, and Economic Security (CARES) Act forbearance plans”. In addition, “about 47 percent of loans in forbearance will expire in the first quarter of 2022; another 42 percent will expire in the second quarter”. They go on to discuss recent trends and provide data on income and demographics of these borrowers.
The point of this brief article is to look at secondary market indicators to shed additional light on these issues. The note is broken into two parts, the first looks at Government programs, notably FHA and VA, while the second looks at the GSEs.
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.