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Comments on Mortgage Performance in October

11/21/2022

 
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:
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A Quick Word on HELOCs

7/13/2022

 
​With mortgage rates near 40-year highs, there has been a pronounced collapse in refinance activity reflected in agency loan originations:
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Agency MBS Issuance Trends in an Environment of Rising Mortgage Rates and House Prices

5/10/2022

 
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:
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A First Look at the Special Eligibility Programs

10/13/2021

 
Recently, the GSE’s Fannie Mae and Freddie Mac released loan-level data associated with their “Special Eligibility Programs” that look to extend credit to low-income borrowers. As housing policy is increasingly focused on providing this market segment access to this market segment, this data will prove useful to housing analysts looking to assess the effectiveness of these programs as well as to traders looking to understand the impact on the performance of MBS containing these loans.

Briefly, each agency has three programs. There are many differences in details between the programs.
  1. Low down-payment programs. Designed for low-income households with limited savings for a down payment, with flexibilities for down payment sources.
    1. FannieMae: Home Ready[1]
    2. Freddie Mac: Home Possible[2]
  2. Loans underwritten by Housing Finance Agencies (HFAs)[3]
    1. FannieMae: HFA Preferred[4]
    2. Freddie Mac: HFA Advantage[5]
  3. Refi programs for low-income borrowers
    1. FannieMae: Refi Now[6]
    2. Freddie Mac: Refi Possible[7]

​As the refi programs are relatively new and volumes are small, in this post we focus on the first two. For convenience, we refer to the first as the “Low-Income Programs” and the second the “HFA Programs”.
Below find the market share of Home Ready and Home Possible out of total volumes for their respective Agencies by loan count:
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Trends in Lending to Low-Moderate Income (LMI) Neighborhoods

7/28/2021

 
Credit provision is one of the great areas of concern addressed by the New Housing Policy. In a previous post[1], we mentioned that we have integrated HUD LMI Neighborhood information with our tools. We can view aggregate credit creation through Cohort Analyzer, and its composition through HMDA Analyzer.
​
2020 marked an unprecedented year for mortgage production as the pandemic sparked aggressive moves by the Federal Reserve driving mortgage rates to record lows, coupled with a flight of households away from density towards more sparsely populated areas. Trends in the major programs by loan count can be seen here:
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*This chart can be duplicated using the above two queries

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Credit Easing

6/9/2021

 
​We received the monthly GSE data download for the June book of business over the weekend and prepayment speeds dropped for the second consecutive month, with the 1-month CPR printed 22.4, the low posted since 17.1% was reached in February 2020 just before the onset of the pandemic.
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Mortgage rates are of course the key driver here, but other issues matter as well, notably lending capacity. With the onset of the pandemic and the associated loosening of monetary policy and spike in demand for housing away from dense locations, the mortgage industry became overwhelmed. Originators were busy hiring and increased their capacity over the past 18 month to deal with the long period of refinancing activity.  However, as prepayment speeds slow down, it appears that the capacity building may be overshooting. In response, originators have started to lower their underwriting standards to create enough volume to fully utilize the capacity.
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Traditionally, the industry fine-tunes its production through tweaking its credit standards to keep its pipeline as full as possible. This is occurring now notably for refinance mortgages:
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What we can see is that purchase demand remains strong, with the swing product being refinance mortgages. It is evident that lenders are trying to smooth out refinance production with countercyclical credit tightening and loosening. As credit scores are higher than was the case in the pre-pandemic period there is room to ease further, but the ultimate extent is highly uncertain.

HMDA 2020 Available on Recursion!

4/27/2021

 
Last August we reported that we had downloaded 2019 HMDA and detailed queries were accessible to our clients via HMDA Analyzer[1]. 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:
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    2. Nonbanks Rule – Covid 19 accelerated the long-term trend increase in nonbank lending share:
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    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:
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​Much more can be found through with just a few clicks of the button.

[1] https://www.recursionco.com/blog/hmda-2019-available-on-recursion

Comments on Cashouts

4/8/2021

 
The increase in the number of cashout refis has led to some concerns about the implications for the quality of household balance sheets, similar to what occurred in the run-up to the Global Financial Crisis[1]. At that time, many homeowners were tempted to use their houses as a “piggy bank” as the national savings rate hit all-time lows. In the runup to the Global Financial Crisis, the national savings rate hit a sixty-year low of 2.2% while over the 2016-2019 period the rate averaged a much healthier 7.6%[2].

It is useful to scale the magnitude of assets being cashed out and Freddie Mac releases a very useful file documenting this quarterly for their book of business back to 1994[3]. In the fourth quarter of 2020, the amount cashed out reached $48.4 billion, about 58% of the $84.0 billion peak attained in the second quarter of 2006. As a share of household net worth, the most recent data point is 3.7%, well below the peak of 12.7% reached in Q2 2006.
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​It’s useful along these lines to ask about the credit profile of cashouts compared to other refinancings. Freddie Mac didn’t report cashout refi separately until 2008 Q3, but the following useful picture can be obtained.
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In general, lenders tend to “lean against the wind” by loosening credit conditions when demand for credit declines, and vice versa. Interestingly, it appears that the share of noncashout loans follows a pattern in which the share rises when credit in general is tightened. At the present time, the average FICO score in March for noncashouts was a tight 764, vs 753 for cashouts. It is difficult to pin the rise in equity cashouts in the current cycle to loosening credit conditions.
​
Of course, the proof is in performance, and now that we have loan-level DQs for the GSE’s beginning last month, we can look at this broken down by loan purpose for the Freddie Mac book:
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​The performance of cashouts is mildly worse than that for noncashouts, but more in line with purchase mortgages. These statistics will bear watching in future months, particularly as forbearance programs begin to expire towards the end of the year.

[1] https://www.nber.org/digest/dec09/refinancing-boom-and-financial-crisis
[2] https://fred.stlouisfed.org/series/PSAVERT
[3] http://www.freddiemac.com/research/datasets/refinance-stats/index.page
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