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.
As stay-at-home orders commenced in most of states during the Covid-19 pandemic, home sales have been heavily impacted. A good timely indicator of home sales is Redfin pending sales. Monthly average seven-days total pending sales, which measure the number of total homes that went under contract in the prior seven days, show normal home sales seasonal patterns from Jan 2019 to Feb 2020. However, the number suddenly declined about 14% from 42,978 in Mar 2020 to 36,794 in Apr 2020, reflecting the big hit caused by the pandemic.
What will MBS issuance look like in the near future? Using our powerful data analytics tool Cohort Analyzer, we easily summarized the Agency (GNM, FNM, FHL) MBS Issuance for home purchases from Jan. 2019 to May 2020(month to date as of the 15th business day of the month). The chart below shows the clear leading relationship between pending sales and over MBS purchase issurance. Thus, we can expect that the decline we observed in pending sales in April is likely to show somewhat softer MBS purchase issurance in the early summer. Continued record-low interest rates, perhaps combined with gradual reopening in some states, should we help to support purchase issuance as the summer progresses. However, given the uncertainty surrounding the reopening process, it is still to early to be confident that the impact of the Covid-19 virus on the housing market and purchase mortgage production has formed a bottom.
 The number excludes homes that were on the market longer than 90 days.
 Data provided by Redfin, a national real estate brokerage.
April mortgage deliveries by the agencies Fannie Mae, Freddie Mac and Ginnie Mae showed a rise in deliveries of mortgages to the two agencies for both home purchases and refinances. Purchase mortgage volumes reflect a normal seasonal pattern, while refinances experienced a sharp spike upwards in response to low levels of interest rates. Given normal (and possibly growing) lags related to closing times, many of these contracts were signed in March when rates had already dropped sharply but the full impact of the Covid-19 virus on stay-at-home policies was not yet fully felt.
With the CARES (Coronavirus Aid Relief and Economic Security) Act offering forbearance to households with mortgages for up to a year, the onus of payments to mortgage investors falls on the mortgage servicers. Much concern has arisen about the ability of these institutions, particularly thinly capitalized nonbank servicers, to meet these obligations. In the case of Ginnie Mae servicers, the PTAP (Pass-Through Assistance Program) was rolled out to provide a line of credit to servicers in Government programs, notably FHA (Federal Housing Administration) and Veterans Administration (VA). In the case of the GSE’s, no such program has been forthcoming and instead, FHFA (Federal Housing Finance Agency) the regulator of the Government Sponsored Enterprises, Fannie Mae and Ginnie Mae, announced that servicers of loans insured by these enterprises is only required to pay investors for the first four months if a loan is in forbearance.
Late on the sixth business-day of every month, Ginnie Mae releases its updated loan tape that allows us to calculate the delinquency rates for its book of mortgages. We received the most recent tape this week, reflecting the mortgage payment activities in March. As most payments are due in the first half of the month, we did not expect to see a very large impact as the scale of the crisis was not fully recognized until the second half of the month. To check for traces of such an impact, we looked at short-term (30day) delinquencies (DQ’s) for loans serviced by nonbanks in the FHA program. We chose FHA because this program tends to support lower-income households, which are more likely to be impacted by the virus. We chose nonbanks because they tend to have somewhat looser lending standards than banks, and consequently higher delinquency rates.
On April 7, 2020 our CEO Li Chang was invited to speak as an industry expert at a graduate-level finance class at the Gabelli School of Business at Fordham University. Students were also given free access to the Recursion Analyzers to help them monitor the current mortgage market trend using big data tools.
Students were introduced to the problem of understanding the role of new mortgage fintech lending based on the use of loan-level data on U.S. mortgage applications and originations reported to their regulators according to the Home Mortgage Disclosure Act (HMDA).
All issues have taken a back seat to the onset of the Covid-19 virus. Since this first arose in China at the end of 2019, concern has steadily mounted, leading to unprecedented dislocations in global financial markets. Markets are volatile to a great degree because of uncertainty, not just about the extent and severity of the virus, but also about its economic impact.
In February 2019, BB&T announced its acquisition of SunTrust Bank for about $28 billion in stock. In December that year, the nation’s 6th biggest bank, Truist, was created. There are, of course, a multitude of reasons why financial institutions merge. A classic explanation is that they wish to obtain economies of scale by combining overlapping operations in particular markets. As regional commercial banks with a heavy consumer focus, both these institutions faced earnings pressure from developing headwinds in the mortgage market as interest rates climbed in 2018. (Table 1).