Policy Primacy

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?
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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.

Run Underlying Query 1

Run Underlying Query 2

Fundamental Factors

• Record-low mortgage rates below 3.0% have provided the expected boost to refi activity. This activity should be supported for a considerable period as the Fed has clearly stated its intention to hold short-term rates near zero at least through 2022[1].
• Refis are limited by capacity constraints but hiring on the part of lenders is expected to boost activity in the intermediate term[2].
• In a capacity constrained market, higher-credit quality borrowers are processed first to maximize revenue. Higher credit-score borrowers of conforming loans have faster speeds in general compared to those with lower scores. The same comparison can be made between high-FICO conforming borrowers and those obtaining FHA loans.
• It is difficult to distinguish between the natural tendency of high quality borrowers to have first access to credit in a capacity constrained market and deliberate credit tightening by lenders. We will only know if credit conditions will return to long-run averages once rates rise and borrower demand softens.

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Policy Factors

• A significant jump in prepayments in FHA loans was observed in late June when Ginnie Mae announced a change in the pooling rule prohibiting re-performing loans from being collateralized in any existing pool type[3]. This resulted in a short-term spike when banks purchased loans out of pools before the resecuritization window closed.
• In mid-August, the GSE’s announced a refi loan fee hike of 50 bp effective September 1. This had little immediate impact on refis because of the short period until implementation.
• At the end of August the fee hike was postponed to December 1. The pace of refinances for loans delivered to the GSE’s picked up in September and October before the fee hike is implemented.

Looking forward, 2021 promises to be a year of intense focus on the policy landscape. Assuming that mortgage rates remain conducive to a robust refi market, key factors include:

• A change in the Administration in Washington leading to the possibility of fee adjustments for both conforming (G-fee) and FHA loans (MIP).
• The possibility that forbearance programs might be extended as the unemployment rate remains historically elevated.
• Once forbearance begins to expire, there is a possibility of more changes in Ginnie pooling requirements to balance out concerns between issuers and investors as loans are purchased out of pools, particularly as these are related to mods.

Once again, the availability of big data tools to analyze emerging trends in market activity is essential to decision making by investors, lenders, servicers and regulators.

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[1] https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20200916.htm
[2] https://www.housingwire.com/tag/mortgage-jobs/
[3] https://www.ginniemae.gov/issuers/program_guidelines/Pages/mbsguideapmslibdisppage.aspx?ParamID=109