As we head into the end of summer, we note that the housing market remains locked into “Mortgage Winter”. Refinance activities are muted as mortgage rates are at a 22-year high. Even purchase mortgage applications are at the lowest level seen since 1995 as homeowners are not willing to give up their mortgages at historical low rates. It’s not hard to imagine that in such a world we will see new behaviors as mortgage lenders struggle to remain viable. PennyMac stood out as one of the more creative lenders that was able to refinance the mortgages it services, indicated by the following chart:
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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:
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:
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.
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:
Credit provision is one of the great areas of concern addressed by the New Housing Policy. In a previous post, 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:
*This chart can be duplicated using the above two queries
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.
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.
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:
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.
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.