Cyclical and secular factors are coming together to boost agency mortgage production. On the cyclical front, record low mortgage rates are the key driver of surging refi activity. Purchase activity is supported as well by low rates, but there are also indications that secular changes surrounding lifestyle choices sparked by the Covid-19 pandemic are leading homeowners to change residences away from the largest urban centers.
One of our major rules at Recursion is that we are a fintech data and analytics company and that we don’t give investment advice. So spoiler alert: the answer to the question is that anything is possible.
But we noticed in the most recent weekly Freddie Mac survey that the 30-year mortgage rate edged up to 3.01% from a record-low 2.98% the prior week, the first sub-3.0% level ever recorded. Market lore says that at a certain level, rates give lenders sticker shock and mark a point below which they are reluctant to venture. In an early blog post we noted that mortgage rates were at record lows, but that Treasury yields were deeper into record-low territory, so mortgage spreads were actually quite wide.
Mortgage rates are set in the market reflecting offsetting pressures including: downward pressure from Federal Reserve purchases, upward pressure from record demand, and the costs of forbearance borne by servicers that they seek to recoup with higher margins on new business. Below is an update to the March chart with a new variable added: the inelegantly named OPUC:
The long-raging and complex debate about housing finance policy basically boils down to two issues: first, how much risk should there be in the system, and second, who should bear it? Previous posts have addressed the use of big data in looking at the first issue by examining the trade-off between credit standards and delinquencies. With regards to the distribution of risk, the topmost issue is the breakdown between the public and private sectors. This note approaches the second question by looking at the market shares of a government agency, FHA, vs that of the GSEs, which represent a mixture of public and private risk.
The competitiveness of one agency vs another is a multifaceted subject, as there are multiple aspects to their interaction. Among other approaches, they may compete via price (insurance fees) or via loan underwriting standards or product innovation. To launch this analysis, we just look at relative prices for purchase loans. As a proxy for price, we compare the weighted average coupon (WAC) between FHA and conforming loans in this category:
Appraisals play an important role in managing the risks associated with residential mortgages. Since 2017, both Fannie Mae and Freddie Mac (GSEs) have published multiple rules (see Appendix below) for lenders to qualify mortgage applications for property inspection waivers (PIW). PIW can reduce the cost of mortgage transactions. However, PIW raised concerns of improper usage among investors, mortgage insurers, regulators and other players in the mortgage market. In particular, research has shown that loans with PIWs prepay much faster than loans without.
In March 2020, both Fannie Mae and Freddie Mac released loan level information regarding “Property Valuation Method” which included the Appraisal Waiver information. The new data regarding PIW’s offers the opportunity to study how this program affects the market.
Mortgage lenders obtain loans through three channels 1) The retail channel through which they originate loans, 2) The wholesale channel through which they purchase loans that are originated by other financial institutions, and 3) the broker channel through which they acquire loans that are originated by the lender through an independent mortgage banker not affiliated with the originating institution. Channels from outside the selling institution are called Third Party Originations or TPO’s. Every month Fannie Mae and Freddie Mac report the selling institution of every loan delivered to them, and the channel by which the loan was obtained. Over the last couple of years there has been a notable rise in the share of the broker channel. This note looks at recent trends and looks for market segments in which these are most pronounced, with an emphasis on the broker channel. Table 1 shows the market shares of sales to the GSE’s by channel.
Previously we have noted the connection between aggregate unemployment and delinquencies in the mortgage market. With the release of state-wide delinquencies for FHA loans earlier this month, we can dig deeper into the connection between mortgage distress and the Covid-19 crisis. Based on data released by the Covid Tracking Project, and the Census Bureau on population, we can correlate infection rates with mortgage delinquency rates.
There is a lot of confusion in the market regarding the interpretation of new data released by the two GSE’s, the delinquency distribution and forbearance distribution for some new pools. The data available so far are very limited, but we can draw some tentative conclusions from what we have.
As of this morning we found 11 pools with both a delinquency distribution and a forbearance distribution from the eMBS data feed. For 6 of them, forbearance numbers are the same as 30d delinquency numbers. For 5 of them, forbearance numbers are bigger than the delinquency numbers, and often by a significant margin.
We previously noted that the recent surge in bank deposits, that is related to rising risk aversion associated with the onset of the Covid-19 crisis, serves to support bank investment in agency Mortgage Backed Securities (MBS). A look at recent Federal Reserve Board data reveals that growing MBS demand is not just the result of greater deposits, but also is due to a desire on the part of depository institutions to reduce risk in the mortgage space.