In a recent post, we discussed the market impact that arose from the imposition, and subsequent reversal, of limits on deliveries of NOO (non owner-occupied) residences, as well as on deliveries via the cash window, to the GSEs[1]. In summary, it discussed how the imposition of limits resulted in declines in the share of the NOO categories in the summer, with some rebound in evidence in Q3 when these were rescinded.

In this exercise, we look at the change in the share of purchase mortgage deliveries to both Enterprises from the same quarter in the prior year. This is done to eliminate the seasonal pattern that is in evidence in these shares that derive from the fact that owner-occupied purchases tend to have a strong seasonal pattern (peak in the spring) while the NOO categories do not. If the suspension of the constraints in September 2021 were binding, we would expect to see a jump in the share in the NOO categories in Q4. This is certainly the case for investment properties:

A curious policy development this year has been the stop-start approach towards the imposition of caps on the GSE’s regarding their purchases of loans backed by non-owner occupied (NOO) residences. In January the Treasury and FHFA amended the Enterprise’s Preferred Stock Purchase Agreements (PSPAs) to limit their acquisitions of single-family mortgage loans secured by second homes and investment properties to 7% of single-family acquisitions over the preceding 52-week period[1]. In September these caps were suspended[2].

Below find charts of the shares of second homes and investment properties out of all purchase mortgage deliveries to Fannie Mae and Freddie Mac, along with supporting fundamental factors.

In both cases, there was a drop in the shares in the NOO categories after the initial policy announcement this year followed by a rebound in recent months. With regards to the fundamental factors, in the case of second homes, the share of purchase mortgages rose from about 6% to 8% following the onset of the pandemic as households sought refuge from densely populated areas. According to the National Association of Realtors, more than 50% of second homes are all-cash transactions, suggesting that the equity market is more important than earned income in driving these buying decisions[3]. Of course, the data used here come from loans in Agency pools, but the performance of the equity market likely has a significant influence on buyer sentiment in this market segment.

The recent acceleration of consumer prices is likely supporting the sales of homes purchased for investment purposes, as real estate is widely seen as a hedge against inflation, in part because mortgage payments will not rise if the purchase is financed with a fixed-rate mortgage.

Once again, we have a case where optimal investment decisions are driven by detailed knowledge of a combination of policy and fundamental factors. Loan-level digital tools are essential in drilling down to the level needed to formulate successful strategies.

In a recent post[1], 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[2]. 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[3]. 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.

In a recent note, we pointed out how a measure of the success of the Unified Mortgage Backed Securities (UMBS) project was the narrowing in the CMO Lockup Rate between Freddie Mac and Fannie Mae[1]. For many years, Fannie Mae benefitted from the liquidity advantage its security maintained compared to that of Freddie Mac, based on its long-standing market leadership position. To compensate, Freddie Mac locked up more of its securities in CMO’s, in an effort to create a supply-constrained premium in its own securities. The degree of success achieved using this strategy could be measured in terms of changes in the “Traditional Share”.

“Traditional Share” is a terminology widely used within Fannie and Freddie, that measures the market share held by Fannie Mae compared to its smaller rival. For example, the Traditional Share of 60, means loans guaranteed by Fannie Mae contribute to 60% of the GSE book, while those guaranteed by Freddie Mac contribute 40%. For the purposes of this note we will measure this in terms of loan count for purchase mortgages only.

In 2014, FHFA announced the establishment of a new securitization infrastructure[2] for all mortgage loans backed by single family residences into a new common security. Historically, the Traditional Share had stood at about 60%, but at that time it had risen to over 70%, putting Freddie Mac into a dire situation. With that announcement, the share started to decline, and by the time the UMBS was launched in 2019 the share had eased back towards the 60% level. As a result, Freddie Mac faced reduced pressure to lock its securities up in CMOs, and the gap between this activity and that of Fannie Mae was about halved over the 2014-2019 time frame. 

Subsequently, the question was whether investors would maintain an indifferent posture between the delivery of Fannie Mae and Freddie Mac UMBS. Lingering fears about the possibility of so-called specified trades faded along with narrowing performance differences between the two agencies, and in recent months the Lockup Gap has almost disappeared. This was recently met with a significant plunge of 8.6% in the Traditional Share in Q3 2021 to a record-low 47.4%.

​Over the past six months, prepayment speeds of Ginnie Mae securities have notably widened against those of the GSEs.

As we have noted many times, one of the best features of loan-level analysis is the ability to segment the mortgage market into components that allow for a deepening of understanding of the behavior of the various market players. In this note we look at two groups: borrowers who get an appraisal and those who are eligible to get one but do not.

In previous posts we pointed out that analysis of the performance characteristics of mortgages with and without appraisal waivers cannot be accomplished by looking at loans with waives vs those without as many loans without waives are ineligible to obtain them. A robust analysis can only be conducted by looking at loans with waivers against loans that are qualified to get one. The qualification characteristics can be complex, but the main factor is LTV, which differs by loan purpose.[1]
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The question that naturally arises is why do some eligible borrowers not obtain a waiver when doing so would save money on the transaction? To address this issue, we look at the distribution of loan sizes for purchase loans with waivers vs those without them that are eligible. Here is the pattern of loans delivered to the GSEs YTD October 2021 by Agency:

In a recent post[1], we looked at the share of the use of the cash window for bank and nonbank sellers. We found a reversal in the long-term upward trend in this share this year, correlated with the imposition of FHFA imposed lender-level caps on the use of the cash window. We next turn to performance.
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We look below at prepayment speeds for the 2018, 2019 and 2020 cohorts broken down by bank and nonbank sellers.

It’s always interesting to look at the underlying dynamics within the mortgage market to get a deeper handle on the forces behind recent trends and to gain insights into the market impact of policy changes. This time we will look at a breakdown of the market between the cash window and swaps. Simply, in a swaps transaction the lender sends loans to one of the Enterprises, Fannie Mae or Freddie Mac, and in return obtains a security which it can keep as an investment (mostly in the case of banks) or else sell into the market (both banks and nonbanks). The alternative is to sell the loans directly to the Agencies for cash. This is important to nonbanks in particular as this cash is used as a funding source for running their businesses.
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As it turns out, neither GSE reports the path by which a loan is obtained in their loan-level disclosures. However, in the case of Freddie Mac, cash loans are placed in their own pools with distinct prefixes.  As a result we can unpack these pools and perform a matching exercise with the loan tape and assign these accordingly. This allows us to perform queries on this characteristic across our loan-level querying tool Cohort Analyzer. Below find the share of deliveries made to Freddie Mac from the Cash Window by loan purpose.