As we approach year-end and the beginning of the process of phasing out forbearance programs, the natural question market participants are asking is which indicators should they be watching to gain a sense of the mortgage landscape in 2022. Along these lines, there is a significant difference between the Ginnie Mae programs and the GSE’s. In particular, for conforming loans, it is the Agencies themselves that buy nonperforming loans out of pools, while for FHA and VA, this function is performed by servicers. As the timeframe for buyouts on the part of the GSE’s was extended to 24 months earlier this year, we won’t see much activity prior to April 2022 on this front[1]. So in this post, we focus on the Ginnie Mae programs.
As we have written previously, it is challenging to follow the path of a loan once it has been purchased out of a pool. At the aggregate level, we can view the activity of individual lenders using the FHA Neighborhood Watch data[2]. In terms of the process, a nonperforming loan is bought out of a pool, and one of three actions can be taken. First, the borrower can be taken into foreclosure. Second, the borrower can become current and roll the unpaid balance into a second lien, in a process known as a partial claim. Third, the borrower can accept a loan modification. In terms of the scale of buyouts, after an early spurt of activity in 2020 on the part of some parties, notably banks, the involuntary prepayment rate, measured by CDR(constant default rate), has settled down in recent months. FHA nonbank servicers have been more active in this space than other categories over the past year. As forbearance plans begin to expire towards the end of the year, these numbers may start to rise. Sometimes, future trends can be seen in the weeds. In this case it’s the 12 FHA and 1 VA mortgages (out of tens of millions) that were securitized this month in Ginnie Mae pool G2 CA8080, the very first RG pool, issued by PNC Bank, delivered to the GNMII20C program. This pool type was first announced by Ginnie Mae last December 4[1], and consists entirely of loans that were bought out of pools and cured with partial claims. These are eligible for resecuritization after 6 months without a missed payment. A previous announcement was made by Ginnie Mae last June that prohibited loans in forbearance from being bought out of pools and resecuritized into any existing pool type[2]. This rule was enacted after large banks purchased a massive number of loans in forbearance and resecuritized them immediately, leading to concerns on the part of investors[3]. Is there anything interesting about these loans? The loans were all originated in 2011-2013, so they are pretty seasoned. Note rates range from 3.75% - 4.25%. Underwriting characteristics vary considerably, with credit scores ranging from 533 to 829, for example. While original LTV’s are generally high (8/13 greater than 90) home price appreciation over the last 8-10 years likely implies that borrowers have considerable equity. More of this to come as forbearance programs begin to run out later this year. Unlike the situation during the Global Financial Crisis, imbalances in the housing market are not the root cause of the Covid-19 economic downturn. Instead, housing is helping to pull the economy out of its pandemic-induced swoon. House price rises have accelerated, due both to low interest rates, as well as to household relocations away from high-density areas. This is leading to increased construction, and improved household balance sheets. Moreover, a surge in refinances improves household cash flow. How long can this trend continue?
The answer to this question depends crucially on many varied policy settings that influence lender and borrower behavior. The chart below shows 1-month CPR for 30-yr MBS securities broken down between the 30-Year GSEs and 30-Year FHA for the 2017cohort. A number of fundamental and policy factors come into play. |
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