We received delinquency and forbearance information for the GSE pools late last night. By balance, the pools with such information cover over 99% of FHL and 92% of FNM pools, which is satisfactory.
In terms of delinquency, Fannie Mae reported higher delinquency rate than Freddie Mac, which is in line with the relatively higher DTI’s seen in FNM deliveries in recent years. Freddie’s 30d delinquency rate reported in May was 2.47%, about 0.4% below the same figure for Fannie Mae .
We have written extensively on the mortgage market impact of the Covid-19 crisis, most recently on the first signs of delinquencies in the loans in the reference pools of the Freddie Mac Structured Agency Credit Risk (STACR) program. In that post we noted the dispersion in 30-day average loan delinquencies by state for May 2020. In this note we look at the distribution of delinquencies in the same month across each of the 28 deals issued to date. We can see a distinct increase in the rate of delinquencies from the onset of the program through 2019, before falling early this year. What can account for this pattern?
In the five-year period from early 2013 to early 2019, we notice that there was a trend loosening in credit standards as measured by the share of loans in Agency securitized pools with debt-to-income ratios in excess of 45. The trend was exacerbated in 2018 due to rising mortgage rates weighing on mortgage production volumes. As rates fell back during the course of 2019, pressure to keep lending standards so loose eased, and fewer high-LTV loans were delivered to the Agencies.
It seems natural to ask if this pattern spills over to the loans in the STACR pools. The chart below shows the share of such loans in high-LTV STACR issues since 2013, plotted against the 30-day May DQ rate for each.
Previously we have noted the connection between aggregate unemployment and delinquencies in the mortgage market. With the release of state-wide delinquencies for FHA loans earlier this month, we can dig deeper into the connection between mortgage distress and the Covid-19 crisis. Based on data released by the Covid Tracking Project, and the Census Bureau on population, we can correlate infection rates with mortgage delinquency rates.
There is a lot of confusion in the market regarding the interpretation of new data released by the two GSE’s, the delinquency distribution and forbearance distribution for some new pools. The data available so far are very limited, but we can draw some tentative conclusions from what we have.
As of this morning we found 11 pools with both a delinquency distribution and a forbearance distribution from the eMBS data feed. For 6 of them, forbearance numbers are the same as 30d delinquency numbers. For 5 of them, forbearance numbers are bigger than the delinquency numbers, and often by a significant margin.
We previously noted that the recent surge in bank deposits, that is related to rising risk aversion associated with the onset of the Covid-19 crisis, serves to support bank investment in agency Mortgage Backed Securities (MBS). A look at recent Federal Reserve Board data reveals that growing MBS demand is not just the result of greater deposits, but also is due to a desire on the part of depository institutions to reduce risk in the mortgage space.
Fannie Mae and Freddie Mac each announced their plans for disclosing forbearance data at the pool level last week. Although it is a little disappointing that the disclosure is on the pool level, the speed of action is still much appreciated.
Just-released data from Freddie Mac is the first clear signal of distress in the conforming mortgage market. Data at the pool level for April 2020 showed a record high share of 30-day delinquencies (dq’s) of 3.735% for pools backed by 30 year mortgages. This data set goes back only to January 2011, so to get a reference to the Global Financial Crisis (GFC) we calculated the 1-month dq for 30 year mortgages from the Freddie Mac Loan Performance data set which goes back to 1999, although the most recent observation is June 2019. This dataset consists of a large sample of Freddie Mac loans but is not the whole universe. During the period of overlap there is a clear correlation between the two series. Finally, we overlay the insured unemployment rate to obtain a clear connection between the shock to the labor market from the Covid-19 virus and borrowers who have missed their mortgage payment.
As noted in an earlier post we discussed how the GSE’s have been sharing credit risk with private investors through the Credit Risk Transfer (CRT) market. At that time, we discussed how losses tended to grow over time, and noted the significant geographical variation in default rates by state, reflecting local economic conditions. Another consideration noted along these lines is underwriting characteristics. This impact is particularly notable when comparing the performance of loans for lower-credit quality borrowers to others. The chart below looks at the relative performance in CRT high-LTV reference pools between those with FICO scores less and equal to 680 and those greater than that score: