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:
We’ve written before about curtailments, which are particularly interesting during times of rising interest rates when refinancings are at low levels. We believe that investors and modelers would benefit from examining this aspect of borrower behavior. A good way to demonstrate this is to look at the home payment patterns of repeat homebuyers. In the recent environment of skyrocketing home prices, buyers of new homes have been confident about their ability to sell their current residence and have been more likely to purchase their new home before they pay off their old mortgage. If this story is true, we would expect to see significant curtailment activity within a few months of the purchase of a residence on the part of repeat buyers. In our previous note, we introduced the concept of a “Constant Curtailment Rate”, and implemented the calculation in Cohort Analyzer to quantify this effect:
With data in hand for the first half of 2022, it seems a good time to revisit the topic of the share of issuance between the two GSEs. This is also, at least implicitly, a hot topic in policy circles following the announcement on the part of the GSEs that they will be imposing a 50 bp fee on commingled Super and CMO pools starting on July 1. Regular readers of our blog will recall how we pointed out that the Fed purchases of Super pools created an imbalance in favor of Freddie Mac loans that may have been a contributing factor to their rise in market share in 2020 and 2021.
Interestingly, the Freddie Mac share of GSE purchase loans has fallen back. As shown in this chart, the FHL share of delivery peaked in August 2021 at 56%, while most recently it stood at 42%.
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:
As mortgage rates have moved up recently, we have observed some changing trends in underwriting characteristics associated with GSE new issuance. According to Freddie Mac, the US weekly average 30-year fixed mortgage rate stood at 3.89% as of Feb 24, 2022, which is about a 1.3% increase since the record low level of 2.65% was reached on Jan 7, 2021.
As mortgage rates decline, originators become capacity constrained and allocate credit to the highest-quality borrowers. Similarly, to keep lending pipelines full, originators are likely to loosen up their underwriting standards when rates rise. After declining in recent years when interest rates were low, GSE new issuance purchase loans with DTI over 45 started to increase again in the second half of 2021, especially for Fannie Mae, as mortgage rates began to rise. Nonbanks have historically been more active in lending to higher DTI borrowers, but recently the gap between banks and nonbanks has narrowed.
We have observed similar trends in credit scores. After the decline in the shares of low credit score borrowers in 2019 and 2020, sellers have recently been delivering an increasing share of loans with credit score less than 680 to the GSEs.
We observe these trends by tracking our monthly data reports. If you are interested in the outlook for mortgage market developments, reach out to firstname.lastname@example.org and subscribe to Recursion Reports!
Recently, the Federal Reserve released its May 2021 Financial Stability Report, with a particular emphasis on asset valuations. Valuations are raised as a concern as “Prices of risky assets have generally increased since November with improving fundamentals, and, in some markets, prices are high compared with expected cash flows”. While not cited as a matter of high alarm the report commented that “House price growth continued to increase, and valuations appear high relative to history.”
On May 25, FHFA released the purchase-only house price index for March, showing a record-high growth rate of 13.9%, far above the bubble-era peak of 10.7% attained in 2005. Housing fundamentals are of course supportive with mortgage rates below 3% and economic activity rebounding as vaccine optimism spreads. The unique factor now in housing is the impact of the pandemic on preferences for housing away from density and towards suburban and smaller-urban centers. This new fundamental can easily be seen via booming housing demand during the pandemic as measured here by purchase mortgage deliveries to Freddie Mac.
Last August we reported that we had downloaded 2019 HMDA and detailed queries were accessible to our clients via HMDA Analyzer. Recently, the CFPB provided a preliminary release of 2020 data, with information from smaller reporters coming a bit later in the year. Nevertheless, the new data is available on HMDA Analyzer and several insights can already be gained.
1. Total Origination loan count grew to its highest level since the runup to the Global Financial Crisis, driven by a surge in refinancings:
2. Nonbanks Rule – Covid 19 accelerated the long-term trend increase in nonbank lending share:
3. The held on book share collapsed, as banks preferred to hold mortgage risk in the form of MBS to avoid the potential for credit losses:
Much more can be found through with just a few clicks of the button.