It is well known that since June 1, 2022, the Federal Reserve has allowed MBS to mature off its balance sheet without replacement[1]. Consequently, the portfolio has declined, but at a very modest pace since high-interest rates have eliminated most of refinance activities:

Last week’s announcement by FHFA of elaborate changes in the GSE’s upfront fee matrixes to be implemented in May[1] reminded us that this is just the latest in a series of announcements made by the housing regulator over the past year. Just over a year ago, FHFA announced fee hikes for second homes and high balance loans.[2] At the time, we looked at the impact of the second home fee hike on the market through the lens of the relative impact compared to investor properties, which did not experience such an increase. To complete the picture, here is a chart for high-balance loans:

​Growing concerns about a looming recession combined with increasing signs of distress in Government mortgage programs, particularly FHA, are leading many market participants to step up their focus on GSE buyouts. These found a recent peak last winter as forbearance programs unwound and have been in a generally declining trend since that time.

​According to a recent Commercial Mortgage Alert article Fannie and Freddie have become more conservative with credit exceptions and maximum proceeds. Compared to the lower debt-service coverage ratios and longer amortization schedules observed in the previous year, “Fannie’s delegated underwriting and servicing program booked $5.28 billion of activity in December, putting its full-year total at $69.30 billion, according to Recursion Co. data”, below the $75 billion cap set by Federal Housing Finance Agency. In the article, Recursion Co. was described as a data source “which historically has closely matched official production figures.”

We are proud to be cited as the leading provider of servicer data to the mortgage market. This data is used by investors, mortgage traders and the servicers themselves to obtain an accurate overview of the servicing landscape. Recursion data and analytics provide essential insights and productivity enhancements essential to thriving in a challenging environment.
 
The article can be found on the Commercial Mortgage Alert website (paywall).
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If you would like a copy of the article, please reach out to inquiry@recursionco.com.

In a recent post[1], we spoke about how the current market environment of high interest and home prices is leading to downward pressure on both supply and demand in the housing market, a situation we call "Mortgage Winter". While this environment is unlikely to result in a severe recession such as the Global Financial Crisis, there is the potential for broad fallout associated with distress in the lender and broker markets.

First, we look at the originations.
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The count of loans that were delivered to the three agencies dropped by 68% from Q4 2021 to Q4 2022:

With 2022 at a close, we can begin to assess the impact of the extraordinary shocks of the past few years on the mortgage market landscape. The boom-bust nature of the housing market since the onset of the Covid-19 pandemic has resulted in an unprecedented degree of uncertainty about the outlook. Most commentary in this regard is understandably focused on home prices, but in the end, real estate is a transactional business, and we focus on that market aspect here:

As the economy slows and the impact of inflation weighs on many households, we have noted signs of distress in mortgage performance in parts of the market despite the resilience observed in the labor market[1]. Another corner of the market that is drawing attention is reverse mortgages. The metric used to assess performance in this space is the number of mandatory purchase events. Unlike the situation in the forward mortgage market, these occur not when the borrower faces financial distress[2], but when the servicer is compelled to purchase a loan out of a pool once the balance reaches 98% of a pre-set amount -- the “Maximum Claim Amount (MCA)”[3]. This amount is capped so as to reduce the risk of the loan amount surpassing the valuation of the collateral. The fundamental factor driving this event is interest rates as HECMs are floating-rate loans, and a higher rate brings the loan balance up faster.
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Recursion’s HECM Analyzer tool allows us to quantify the number of prepayments that are due to this factor, both in absolute dollar amount and as a share of total prepayments.

Recursion has undertaken an intensive effort to compute the size of the Agency CMO market back to 2000. The size of the Agency CMO market is calculated by building up from the loan level. This data is provided by agency disclosure of the portfolio of each collateral group and collected from text files, pdfs, and other formats across single-family and multifamily CMOs. The formats of the disclosure files differed across agencies and changed over time, presenting a challenge to unify.

The inconsistent data quality posed another challenge. The single metric we used to assess quality was assets = liabilities. The existence of Re-Remics and IOs introduced overcounting, which we eliminated using an algorithm that closed the asset-liability gap, with the remaining portion largely explained by over-collateralization. In the end, we were able to construct a direct relationship with all single-family and multifamily CMOs and the loans backing them up via the “exploded method”.
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We performed these calculations by agency for both single-family and multifamily loans on a monthly basis. Below find bar charts of the progression of the single and multifamily CMO markets back to 2000 on a year-end basis. The single-family CMOs for the three agencies are fairly homogenous. For multifamily CMOs, we include the CMOs collateralized by Ginnie Mae multifamily pools backed by Ginnie construction loans and project loans. For Fannie Mae, we include Fannie Mae GeMS (CMO deals backed by Fannie DUS pools), and for Freddie Mac, we include all Freddie K deals-- classifying them as 100% CMO due to their structure.