The Rebound in GSE Tail Risk

​As mortgage rates have moved up recently, we have observed some changing trends in underwriting characteristics associated with GSE new issuance. According to Freddie Mac, the US weekly average 30-year fixed mortgage rate stood at 3.89% as of Feb 24, 2022, which is about a 1.3% increase since the record low level of 2.65% was reached on Jan 7, 2021.

​As mortgage rates decline, originators become capacity constrained and allocate credit to the highest-quality borrowers. Similarly, to keep lending pipelines full, originators are likely to loosen up their underwriting standards when rates rise. After declining in recent years when interest rates were low, GSE new issuance purchase loans with DTI over 45 started to increase again in the second half of 2021, especially for Fannie Mae, as mortgage rates began to rise. Nonbanks have historically been more active in lending to higher DTI borrowers, but recently the gap between banks and nonbanks has narrowed.

We have observed similar trends in credit scores. After the decline in the shares of low credit score borrowers in 2019 and 2020, sellers have recently been delivering an increasing share of loans with credit score less than 680 to the GSEs.

We observe these trends by tracking our monthly data reports. If you are interested in the outlook for mortgage market developments, reach out to [email protected] and subscribe to Recursion Reports!