The release of the Agency performance data in early May provided confirmation that the dip in Early Payment Defaults[1] we have witnessed over the last three months ended a 16-month long uptrend in this statistic for FHA loans. A similar but far more muted pattern can be seen for VA and conventional mortgages. In a previous post, we speculated that the uptrend was correlated with the higher inflationary trend observed since early 2021[2]. Below please find an update of the chart:

As daily April Agency mortgage loan delivery data completed, we found convincing evidence that the freeze in market activities we have witnessed since the fourth quarter of 2022 is continuing, although there are some new twists.
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Here is the chart for the loan counts of purchase market deliveries to the GSEs back to 2019. Rather than do this as a time series, we stack the years over an annual monthly x-axis to better correct for the seasonality in the time series:

The recent release of “Social Scores” on the part of the GSE’s serves to point out the broad range of ESG issues facing the mortgage market.[1] Of course, this covers a lot of policy territory, and over time investors, lenders and policymakers will have to come to grips with the details associated with these concerns. In today’s post, we look at environmental issues related to the condo market.

These issues came to a head with the disaster in Surfside Florida in June 2021, when the partial collapse of Champlain Towers South, a 12-story condo, resulted in 98 deaths and over $1 billion being awarded to victims in a class action lawsuit. Implications for regulation and insurance costs continue to be felt as the event brought home the immediacy of issues surrounding climate change to the general public.

In October 2021, Fannie Mae issued a Lender Letter presenting tightened requirements that impact the eligibility of loans made in buildings with five or more attached units[2]. These new policies were “designed to support the ongoing viability of condo and co-op projects…(as) aging infrastructure and significant deferred maintenance are a growing concern across the nation.” These new standards came into effect on January 1, 2022. Among other things, they may land a building on an “unavailable” status if there is significant deferred maintenance, failure to pass local regulatory inspections, or not meeting the 10% budget reserve requirement.
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To see if there is any impact, we start with a look at Freddie Mac and Fannie Mae condo loan deliveries from January 2019 to March 2023. During this period, the two Enterprises delivered 1.16 million purchase loans securitized by a condo, of which Fannie Mae generally had a share of about 57%:

In a recent post, we introduced the Recursion Agency Multifamily Dataset,[1] a complete accounting of multifamily loans securitized in Agency pools, going back to 2009. We provided a breakdown of issuance for the total market and by agency in that post. A natural question that arises is how can we benchmark our new dataset?
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In this case, we look at outstanding balance rather than issuance volume. The Agencies provide quarterly data on total outstanding balances on their web sites[2]. When we compare this to our own data, we get this:

Over the past 18 months, Recursion has undertaken an extensive effort to aggregate multifamily loans and properties across all three Agencies by Deal Type. The data is complete back to 2009 for all three Agencies and somewhat longer for individual deal types. This allows us to aggregate the loans to the pool and then CMO levels for in-depth analysis. An innovation is that we have tied the loans to the property level, giving us the ability to perform analyses on a wide variety of topics, including ESG considerations and much more[1].
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For this note, we will provide a basic overview of the dataset. Here is the topmost view from the Agency level:

It is well known that since June 1, 2022, the Federal Reserve has allowed MBS to mature off its balance sheet without replacement[1]. Consequently, the portfolio has declined, but at a very modest pace since high-interest rates have eliminated most of refinance activities:

Last week’s announcement by FHFA of elaborate changes in the GSE’s upfront fee matrixes to be implemented in May[1] reminded us that this is just the latest in a series of announcements made by the housing regulator over the past year. Just over a year ago, FHFA announced fee hikes for second homes and high balance loans.[2] At the time, we looked at the impact of the second home fee hike on the market through the lens of the relative impact compared to investor properties, which did not experience such an increase. To complete the picture, here is a chart for high-balance loans:

​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.