In a recent post, we noted that delinquency rates for two classes of FHA modified loans were rising faster than for the general population, namely reperforming (RG) and extended term (ET) loans[1]. In this post, we dig down into details to get a closer view of the behavior of lenders in these categories.
We start with RG loans. As noted in the previous blog, the program was launched in January 2021, allowing borrowers who had outstanding unpaid balances from the Covid period but six consecutive months of payments to roll the balances into a “partial claim” due when the loan is extinguished. At that time, a new “RG” custom pool category was formed to issue these mortgages. Starting in February 2023, the seasoning period was reduced from six to three months and these loans became eligible to be issued in Ginnie Mae multi-issuer pools. The share of these loans in multi-issuer pools reached over 2/3 at the end of 2023. Delinquency rates are modestly higher for RG loans in multi-issuer pools relative to RG pools even though they are relatively new. One topic that comes up is which servicers are most involved in this loan type and how much variation in behavior can be seen across these institutions. Below find the list of the top 15 institutions issuing RG loans and the distribution of each by pool type Analyzing trends in market performance requires two things, 1) a lot of data, and, 2) a deep understanding of the structure of markets. We recently came across a good example of this with relative delinquency rates between GNM and GSE pools[1]. In this post, we look at the dynamics of the two categories of reperforming mortgage loans.
Investors have spent many years building models of prepayment speeds for mortgage pools based on a variety of characteristics such as loan size and underwriting characteristics. However, institutional factors can come into play as well. One that comes to mind is the difference in program structure between conventional and government loans. For the conforming market, the issuer is a GSE, while for government programs, it is the servicer. In both categories, when a loan becomes seriously delinquent, it can be bought out of the pool at par, amounting to a prepayment. The difference is that for the case of conforming loans, it is the quasi-public GSEs that perform this function, while for government programs, the decision is up to private sector entities. In the first case, there are overarching policy goals that weigh on decisions about the disposition of loans in delinquency, while in the second case, these decisions are based on financial considerations. One way to test this is to look at buyouts over the interest rate cycle. Below find a chart containing the shares of reperforming loans in new issuance for FHA, VA and the GSEs. These are loans that have been previously bought out of pools and then reissued into new pools. There can be a substantial lag between the buyout and re-issuance. In recent posts, we’ve been tracking the progress of loans coming out of forbearance into various pool types such as Reperforming (RG), Extended Term (ET) and, even Private Label pools[1]. A different perspective can be obtained by looking at the disposition of loans with partial claims. Recall that a partial claim occurs when a borrower with missed payments can resume making payments but does not have the resources to increase payments to compensate for the balance missed. In general, the missed payments are placed into a subordinate lien that comes due when the mortgage is extinguished. It is important to note that a partial claim is not a modification, and a loan with a partial claim does not have to be in a forbearance program.
Recently, Ginnie Mae announced that they would disclose the share of loans in pools with partial claims[2]. Below find a summary table of these results reported first ever as of April, 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: In a recent post[1], we discussed the disposition of loans that are exiting forbearance programs. In the Ginnie Mae programs, many loans bought out of pools have received modifications or other workouts, and then redelivered to Ginnie Mae pools. However, we have historically observed that there are more loans bought out than re-delivered, even considering the time needed for the workout. As it turns out, there are other market-based outlets for these loans, which is more evident at the issuer level than in aggregate.
Below find a chart of buyout and securitization activities within Ginnie Mae program for Lakeview, the third-largest Ginnie Mae servicer as of April 2022. With the expiration of forbearance programs underway, there is an interesting question about how loans exiting these programs will perform once they are resecuritized. For Ginnie Mae programs, these are either loans that exit forbearance with a partial claim or receive a permanent mod under the various waterfall options in the FHA or VA programs. In our previous blogs[1], we have noted MOD and RG loans are becoming a significant portion of loans delivered to newly issued Ginnie Mae pools.
In a fine recent paper, the Federal Reserve Bank of Philadelphia “highlights the immediacy of the challenges facing mortgage servicers and policymakers” that arise from the resolution of mortgage forbearance and delinquencies[1]. As of the time of writing, the Philly Fed stated that “some 2.73 million mortgages are either in forbearance or past due; about 0.78 million of those are in Coronavirus Aid, Relief, and Economic Security (CARES) Act forbearance plans”. In addition, “about 47 percent of loans in forbearance will expire in the first quarter of 2022; another 42 percent will expire in the second quarter”. They go on to discuss recent trends and provide data on income and demographics of these borrowers.
The point of this brief article is to look at secondary market indicators to shed additional light on these issues. The note is broken into two parts, the first looks at Government programs, notably FHA and VA, while the second looks at the GSEs. Mortgage market analysis in 2022 is setting up to be very much focused on the impact of expiring forbearance programs. In this post, we look at the FHA program from this perspective. With the onset of the pandemic, FHA began to apply “Partial Claim”s, a seldom-used loss mitigation method to help its mortgage borrowers cope with financial difficulties stemming from the pandemic.[1] A Partial Claim is a no-interest junior claim consisting of missed P&I payments secured by the property that comes due when the first lien is extinguished. Ginnie Mae created a new pool type, the RG pool, mainly to take delivery of the loans received via a partial claim, after they successfully made six6 consecutive payments. Another FHA innovation is the availability of an automatic modification that allows borrowers exiting forbearance to have access to a program that reduces monthly payments by up to 25%[2] without impacting their credit. The result has been a sharp change in the composition of FHA loans delivered to Ginnie Mae program over the past year. This changing composition will likely have a measurable impact on pool performance. In this regard, it’s interesting to look at the credit scores of borrowers across loan types. Original Credit scores for RG loans look very much like those in the overall pool. And while credit scores for modified loans remain below those overall, the gap has narrowed since the new waterfall was made available. As a result, we are once again in the situation where we can’t confidently extrapolate historical trends about the relationship of loan performance and economic factors like interest rates and unemployment as a basis for decision-making. Instead, it is the details in the policy changes designed to keep borrowers in their homes that provide the clearest view on market performance. |
Archives
February 2024
Tags
All
|