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EDGE: Extended Delinquencies in Loan Balance Stories

In June, we highlighted Fannie Mae’s and Freddie Mac’s new “expanded delinquency” states. The Enterprises are now reporting delinquency states from 1 to 24 months to better account for loans that are seriously delinquent and not repurchased under the extended timeframe for repurchase of delinquent loans announced in 2020.

This new data reveals a strong correlation between loan balance and “chronically delinquent” loans. In the graph below, we chart loan balance on the x-axis and 180+Day delinquency on the y-axis, for 2017-18 production 30yr 3.5s through 4.5 “generic” borrowers.[1]

As the graph shows, within a given coupon, loans with larger original balances also tended to have higher “chronic delinquencies.

The graph above also illustrates a clear correlation between higher chronic delinquencies and higher coupons. This phenomenon is most likely due to SATO. While each of these queries excluded low-FICO, high-LTV, and NY loans, the 2017-18 30yr 3.5 cohort was mostly at-the-money origination, whereas 4.0s and 4.5s had an average SATO of 30bp and 67bp respectively. The higher SATO indicates a residual credit quality issue. As one would expect, and we demonstrated in our June analysis, lower-credit-quality loans tend also to have higher chronic delinquencies.

The first effect – higher chronic delinquencies among larger loans within a coupon – is more challenging to understand. We posit that this effect is likely due to survivor bias. The large refi wave over the last 18 months has factored-down higher-balance cohorts significantly more than lower-balance cohorts.

Higher-credit-quality borrowers tend to refinance more readily than lower-credit-quality borrowers, and because the larger-loan-balance cohorts have seen higher total prepayments, these same cohorts are left with a larger residue of lower-quality credits. The impact of natural credit migration (which is observed in all cohorts) tends to leave behind a larger proportion of credit-impaired borrowers in faster-paying cohorts versus the slower-paying, lower-loan-balance cohorts.

The higher chronic delinquencies in larger-loan-balance cohorts may ultimately lead to higher buyouts, depending on the resolution path taken. As loan balance decreases, the lower balance cohorts will have reduced risk to these potential buyouts, leaving them better protected to any uptick in involuntary speeds.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


[1] We filtered for borrowers with LTV<=80, FICO>=700, and ex-NY. We chose 2017-18 production to analyze, to give sufficient time for loans to go chronically delinquent. We see a similar relationship in 2019 production, see RiskSpan for details.


EDGE: Extended Delinquencies in FNMA and FHLMC Loans

In June, the market got its first look at Fannie Mae and Freddie Mac “expanded delinquency” states. The Enterprises are now reporting delinquency states out to 24 months to better account for loans that are seriously delinquent and not repurchased under the extended timeframe for repurchase of delinquent loans announced in 2020. In this short post, we analyze those pipelines and what they could mean for buyouts in certain spec pool stories. 

First, we look at the extended pipeline for some recent non-spec cohorts. The table below summarizes some major 30yr cohorts and their months delinquent. We aggregate the delinquencies that are more than 6 months delinquent[1] for ease of exposition. 

Recent-vintage GSE loans with higher coupons show a higher level of “chronically delinquent” loans, similar to the trends we see in GNMA loans. 

Digging deeper, we filtered for loans with FICO scores below 680. Chronically delinquent loan buckets in this cohort are marginally more prevalent relative to non-spec borrowers. Not unexpectedly, this suggests a credit component to these delinquencies.

Finally, we filtered for loans with high LTVs at origination. The chronically delinquent buckets are lower than the low FICO sector but still present an overhang of potential GSE repurchases in spec pools.

It remains to be seen whether some of these borrowers will be able to resume their original payments —  in which case they can remain in the pool with a forbearance payment due at payoff — or if the loans will be repurchased by the GSEs at 24 months delinquent for modification or other workout. If the higher delinquencies lead to the second outcome, the market could see an uptick in involuntary speeds on some spec pool categories in the next 6-12 months.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


[1] The individual delinquency states are available for each bucket, contact us for details.


EDGE: New Forbearance Data in Agency MBS

Over the course of 2020 and into early 2021, the mortgage market has seen significant changes driven by the COVID pandemic. Novel programs, ranging from foreclosure moratoriums to payment deferrals and forbearance of those payments, have changed the near-term landscape of the market.

In the past three months, Fannie Mae and Freddie Mac have released several new loan-level credit statistics to address these novel developments. Some of these new fields are directly related to forbearance granted during the pandemic, while others address credit performance more broadly.

We summarize these new fields in the table below. These fields are all available in the Edge Platform for users to query on.

The data on delinquencies and forbearance plans covers March 2021 only, which we summarize below, first by cohort and then by major servicer. Edge users can generate other cuts using these new filters or by running the “Expanded Output” for the March 2021 factor date.

In the first table, we show loan-level delinquency for each “Assistance Plan.” Approximately 3.5% of the outstanding GSE universe is in some kind of Assistance Plan.

In the following table, we summarize delinquency by coupon and vintage for 30yr TBA-eligible pools. Similar to delinquencies in GNMA, recent-vintage 3.5% and 4.5% carry the largest delinquency load.

Many of the loans that are 90-day and 120+-day delinquent also carry a payment forbearance. Edge users can simultaneously filter for 90+-day delinquency and forbearance status to quantify the amount of seriously delinquent loans that also carry a forbearance versus loans with no workout plan.[2]  Finally, we summarize delinquencies by servicer. Notably, Lakeview and Wells leads major servicers with 3.5% and 3.3% of their loans 120+-day delinquent, respectively. Similar to the cohort analysis above, many of these seriously delinquent loans are also in forbearance. A summary is available on request.

In addition to delinquency, the Enterprises provide other novel performance data, including a loan’s total payment deferral amount. The GSEs started providing this data in December, and we now have sufficient data to start to observing prepayment behavior for different levels of deferral amounts. Not surprisingly, loans with a payment deferral prepay more slowly than loans with no deferral, after controlling for age, loan balance, LTV, and FICO. When fully in the money, loans with a deferral paid 10-13 CPR slower than comparable loans.

Next, we separate loans by the amount of payment deferral they have. After grouping loans by their percentage deferral amount, we observe that deferral amount produces a non-linear response to prepayment behavior, holding other borrower attributes constant.

Loans with deferral amounts less than 2% of their UPB showed almost no prepayment protection when deep in-the-money.[3] Loans between 2% and 4% deferral offered 10-15 CPR protection, and loans with 4-6% of UPB in deferral offered a 40 CPR slowdown.

Note that as deferral amount increases, the data points with lower refi incentive disappear. Since deferral data has existed for only the past few months, when 30yr primary rates were in a tight range near 2.75%, that implies that higher-deferral loans also have higher note rates. In this analysis, we filtered for loans that were no older than 48 months, meaning that loans with the biggest slowdown were typically 2017-2018 vintage 3.5s through 4.5s.

Many of the loans with P&I deferral are also in a forbearance plan. Once in forbearance, these large deferrals may act to limit refinancings, as interest does not accrue on the forborne amount. Refinancing would require this amount to be repaid and rolled into the new loan amount, thus increasing the amount on which the borrower is incurring interest charges. A significantly lower interest rate may make refinancing advantageous to the borrower anyway, but the extra interest on the previously forborne amount will be a drag on the refi savings.

Deferral and forbearance rates vary widely from servicer to servicer. For example, about a third of seriously delinquent loans serviced by New Residential and Matrix had no forbearance plan, whereas more than 95% of such loans serviced by Quicken loans were in a forbearance plan. This matters because loans without a forbearance plan may ultimately be more subject to repurchase and modification, leading to a rise in involuntary prepayments on this subset of loans.

As the economy recovers and borrowers increasingly resolve deferred payments, tracking behavior due to forbearance and other workout programs will help investors better estimate prepayment risk, both due to slower prepays as well as possible future upticks in buyouts of delinquent loans.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.




[1] A link to the Deferral Amount announcement can be found here, and a link to the Forbearance and Delinquency announcement can be found here. Freddie Mac offers a helpful FAQ here on the programs.

[2] Contact RiskSpan for details on how to run this query.

[3] For context, a payment deferral of 2% represents roughly 5 months of missed P&I payments on a 3% 30yr mortgage.


EDGE: An Update on GNMA Delinquencies

In this short post, we update the state of delinquencies for GNMA multi-lender cohorts, by vintage and coupon. As the Ginnie market has shifted away from bank servicers, non-bank servicers now account for more than 75% of GNMA servicing, and even higher percentages in recent-vintage cohorts.  

The table below summarizes delinquencies for GN2 cohorts where outstanding balance is greater than $10 billion. The table also highlights, in red, cohorts where delinquencies are more than 85% attributable to non-bank servicersThat non-banks are servicing so many delinquencies is not surprising given the historical reluctance (or inability)of these servicers to repurchase delinquent mortgages out of pools (see our recent analysis on this here). This is contributing to an extreme overhang of non-bankserviced delinquencies in recent-vintage GNMA cohorts. 

The 60-day+ delinquencies for 2018 GN2 3.5s get honorable mention, with the non-bank delinquencies totaling 84% of all delinquencies, just below our 85% threshold. At the upper end, delinquencies in 2017 30yr 4s were 93% attributable to non-bank servicers, and they serviced nearly 90% of 2019 delinquencies across all coupons.

The delinquencies in this analysis are predominantly loans that are six-months or more delinquent and in COVID forbearance.[1] Current guidance from GNMA gives servicers the latitude to leave these loans in pools without exceeding their seriously delinquent threshold.[2] However, as noted in our previous research, several non-bank servicers have started to increase their buyout activity, driven by joint-ventures with GNMA EBO investors and combined with a premium bid for reperforming GNMA RG pools. While we saw a modest pullback in recent buyout activity from Lakeview,[3] which has been at the vanguard of the activity, the positive economics of the trade indicates that we will likely see continued increases in repurchases, with 2018-19 production premiums bearing the brunt of involuntary speed increases.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


[1] Breakdown of delinquencies available on request.

[2] GNMA APM 2020-17 extended to July 31st the exemption of counting post-COVID delinquencies as part of the servicer’s Seriously Delinquent count.

[3] Lakeview repurchased 15% of seriously delinquent loans in January, down from 22% in December. Penny Mac and Carrington continued their repurchases at their recent pace.


EDGE: An Update on GNMA Buyout Efficiency

In July, we examined buyouts of delinquent GNMA loans, with special focus on the buyout efficiency for bank servicers. At that time, several banks were 98% to 99% efficient at buying out delinquent loans, where efficiency is defined as the percentage of 90+ days delinquent loans that are repurchased. In this short note, we update the buyout efficiency of major bank and non-bank servicers. 

Buyout efficiency varies widely among banks. While the most efficient banks repurchase nearly 100% of eligible loansothers, including Flagstar and Citizens Bank, opt to leave virtually all the 90+ day delinquent loans they service in securities. In the table below, we show the dollar-weighted buyout efficiencies for top banks, as well as the UPB of each bank’s unpurchased 90+ day delinquent loans, as of the January 2021 factor date.

Buyout efficiency for 90+ day delinquent loans, data as of January 2021. 

Servicers listed by total UPB serviced.

The overhang of seriously delinquent loans serviced by Flagstar and Citizens is spread across several GN2 Multi-lender sectors, with concentrations of delinquent loans rising to just 1% of the total current face of 2018 4% and 2018 4.5% cohorts. If Flagstar and Citizens were to repurchase all of their delinquent loans in a single month, it would add roughly 11-12 CPR to these cohorts. This represents the upper limit in involuntary speed, and actual speeds would likely be much slower with repurchases spread over several months.

The markedly lower buyout efficiency among GNMA non-bank servicers has created involuntary prepay overhang that is potentially much more daunting. The following table summarizes top non-bank servicers, their buyout efficiency over the past two quarters, and their current overhang of 90+ day delinquent loans.

Buyout efficiency for 90+ day delinquent loans, data as of January 2021.

Servicers listed by total UPB serviced.

Both Penny Mac and Lakeview have improved their buyout efficiency over the last quarter and may continue to do so, as more investors begin to embrace the GNMA EBO trade. The multi-lender cohorts with the most exposure to 90+ day DQ loans serviced by Penny Mac or Lakeview include 2020 3.5s as well as 2017-19 production 3.5s and 4s, with each cohort ranging between 4% to 5% of its current face.

This final table, below, illustrates the impact of forbearance on buyout activity among non-banks. While forbearance status seems to pose no impediment to buyouts for banks — in fact, banks with the highest buyout efficiency seem to favor repurchasing loans that are in COVID-forbearance over loans that are “naturally” delinquent – non-bank behavior is more nuanced.

Of the top five non-bank servicers, only Lakeview has generated significant repurchases of loans in COVID forbearance, repurchasing 10% of eligible loans in Q4. In the table below, we separate the 90+ day delinquent loans by their forbearance status and then compute each servicer’s buyout efficiency across these sub-cohorts.

Buyout efficiency for 90+ day delinquent loans, data as of January 2021.

Lakeview’s buyout behavior suggests that forbearance is not an impediment to non-bank repurchases. If we see continued improvements in buyout efficiency over the next few months, involuntary speeds in GNMA securities have the potential to rise significantly.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


EDGE: GNMA Forbearance End Date Distribution

With 2021 underway and the first wave of pandemic-related FHA forbearances set to begin hitting their 12-month caps as early as March, now seems like a good time to summarize where things stand. Forbearance in mortgages backing GNMA securities continues to significantly outpace forbearance in GSE-backed loans, with 7.6% of GNMA loans in forbearance compared to 3.5% for Fannie and Freddie borrowers.[1] Both statistics have slowly declined over the past few months.

Notably, the share of forbearance varies greatly amongst GNMA cohorts, with some cohorts having more than 15% of their loans in forbearance. In the table below, we show the percentage of loans in forbearance for significant cohorts of GN2 30yr Multi-lender pools.

Percent of Loans in Forbearance for GNMA2 30yr Multi-lender Pools:

Cohorts larger than $25 billion. Forbearance as of December 2020 factor date.

Not surprisingly, newer production tends to experience much lower levels of forbearance. Those cohorts are dominated by newly refinanced loans and are comprised mostly of borrowers that have not struggled to make mortgage payments. Conversely, 2017-2019 vintage 3s through 4.5s show much higher forbearance, most likely due to survivor bias – loans in forbearance tend not to refinance and are left behind in the pool. The survivor bias also becomes apparent when you move up the coupon stack within a vintage. Higher coupons tend to see more refinancing activity, and that activity leaves behind a higher proportion of borrowers who cannot refinance due to the very same economic hardships that are requiring their loans to be in forbearance.

GNMA also reports the forbearance end date and length of the forbearance period for each loan. The table below summarizes the distribution of forbearance end dates across all GNMA production. This date is the last month of the currently requested forbearance period.[2]

For loans with forbearance ending in December 2020 (last month), half have taken a total of 9 months of forbearance, with most of the remaining loans taking either three or six months of forbearance.

 

 

For loans whose forbearance period rolls in January and February 2021, the total months of forbearance is evenly distributed between 3, 6, and 9 months. Among loans with a forbearance end date of March 2021, more than half will have taken their maximum twelve months of forbearance.[3]

In the chart below, we illustrate how things would look if every Ginnie Mae loan currently in forbearance extended to its full twelve-month maximum. As this analysis shows, a plurality of these mortgages – more than 25 percent — would have a forbearance end date of March 2021, with the remaining forbearance periods expiring later in 2021.

A successful vaccination program is expected to stabilize the economy and (hopefully) end the need for wide-scale forbearance programs. The timing of this economic normalization is unclear, however, and the distribution of current end dates, as illustrated above, suggests that the existing forbearance period may need to be extended for some borrowers in order to forestall a potentially catastrophic credit-driven prepayment spike in GNMA securities.

Contact us if you interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


[1] As of the December 2020 factor date, using the data reported by the GSEs and GNMA. This data may differ marginally from the Mortgage Bankers Association survey, which is a weekly survey of mortgage servicers.

[2] Data as of the December 2020 factor date.

[3] Charts of January, February and March 2021 rolls are omitted for brevity. See RiskSpan for a copy of these charts.


EDGE: COVID Forbearance and Non-Bank Buyouts

November saw a significant jump in GNMA buyouts for loans serviced by Lakeview. Initially, we suspected that Lakeview was catching up from nearly zero buyout activity in the prior months, and that perhaps the servicer was doing this to keep in front of GNMA’s requirement to keep seriously delinquent loans below the5% of UPB threshold. [1]

 

Buyout rates for some major non-bank servicers.

Using EDGE to dig further, we noticed that Lakeview’s buyouts affected both multi-lender and custom pools in similar proportions and were evenly split between loans with an active COVID forbearance and loans that were “naturally” delinquent.

The month-on-month jump in Lakeview buyouts on forborne loans is notable. The graph below plots Lakeview’s buyout rate (CBR) for loans that are 90-days+ delinquent.

Further, the buyouts were skewed towards premium coupons. Given this, it is plausible that the buyouts are economically driven [2] and that Lakeview is now starting to repurchase and warehouse delinquent loans, something that non-banks have struggled with due to balance sheet and funding constraints.

Where do the current exposures lie? The table below summarizes Lakeview’s 60-day+ delinquencies for loans in GN2 multi-lender pools, for coupons and vintages where Lakeview services a significant portion of the cohort. Not surprisingly, the greatest exposure lies in recent-vintage 4s through 5s.

To lend some perspective, in June 2020 Wells serviced around one-third of 2012-13 vintage 3.5s and approximately 8% of its loans were 60-days delinquent, all non-COVID related.

This analysis does not include other non-bank servicers. As a group, non-bank servicers now service more than 80% of recent-vintage GN2 loans in multi-lender pools. The Lakeview example reflects mounting evidence that COVID forbearance is not an impediment to repurchasing delinquent loans.

If you interested in seeing variations on this theme, contact us. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


 

 

[1] Large servicers are required to keep 90-day+ delinquencies below 5% of their overall UPB. GNMA has exempted loans that are in COVID forbearance from this tally.

[2] Servicers can repurchase GNMA loans that have missed 3 or more payments at par. If these loans cure, either naturally or due to modification, the servicer can deliver them into a new security. Given that nearly all GNMA passthroughs trade at a significant premium to par, this redelivery can create a substantial arbitrage opportunity, even after accounting for the trial period for the modification.


EDGE: Unexplained Prepayments on HFAs — An Update

In early October, we highlighted a large buyout event for FNMA pools serviced by Idaho HFA, the largest servicer of HFA loans. On October 28, FNMA officially announced that there were 544 base-pools with erroneous prepayments due to servicer reporting error. The announcement doesn’t mention the servicer of the affected pools, but when we look at pools that are single-servicer, every one of those pools is serviced by Idaho HFA.

FNMA reports the “September 2020 Impacted Principal Paydown” at $133MM. The September reported prepayment for FNMA Idaho HFA pools was 43 CPR on a total of just over $6B UPB. If we add back the principal from the impacted paydown, the speed should have been 26 CPR, which is closer to the Freddie-reported 25 CPR.

FNMA provides an announcement here and list of pools here. According to the announcement, FNMA will not be reversing the buyout but instead recommends that affected investors start a claims process. We note that Idaho HFA prepayment speeds will continue to show these erroneous buyouts in the October factor date.

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EDGE: Unexplained Behavior for Idaho HFA

People familiar with specified pool trading recognize pools serviced by the state housing finance authorities as an expanding sector with a rich set of behavior. The Idaho Housing Finance Authority leads all HFAs in servicing volume, with roughly $18B in Fannie, Freddie and Ginnie loans.[1]

In the October prepay report, an outsized acceleration in speeds on FNMA pools serviced by the Idaho HFA caught our attention because no similar acceleration was occurring in FHLMC or GNMA pools.

Speeds on Idaho HFA-serviced pools for GNMA (orange), FHLMC (blue), and FNMA (black)

Digging deeper, we analyzed a set of FNMA pools totaling around $3.5B current face that were serviced entirely by the Idaho HFA. These pools experienced a sharp dip in reported forbearance from factor dates August through October, dropping from nearly 6% in forbearance to zero before rebounding to 4.5% (black line). By comparison, FHLMC pools serviced by the Idaho HFA (blue line) show no such change.

Seeking to understand what was driving this mysterious dip/rebound, we noticed in the October report that 2.7% of the Fannie UPB serviced by the Idaho HFA was repurchased (involuntarily) on account of being 120 days delinquent, thus triggering a large involuntary prepayment which was borne by investors.

We suspect that in the September report, loans that were in COVID-forbearance were inadvertently reclassified as not in forbearance. In turn, this clerical error released these loans from the GSE’s moratorium on repurchasing forbearance-delinquent loans and triggered an automatic buyout of these 120+ day delinquent loans by FNMA.

We have asked FNMA for clarification on the matter and they have responded that they are looking into it. We will share information as soon as we are aware of it.

 


 

 

[1] Idaho HFA services other states’ housing finance authority loans, including Washington state and several others.

 

If you are interested in seeing variations on this theme, contact us. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


 


EDGE: An Update on Property Inspection Waivers

In June, we wrote about the significant prepay differences observed between loans with full inspection/appraisals and loans with property inspection waivers (PIW). In this short piece, we revisit these relationships to see if the speed differentials have persisted over the previous four months.

From an origination standpoint, PIWs continue to gain in popularity and are beginning to approach half of all new issuance (blue line). For refi loans this figure approaches 60% (green line).

Graph 1: Percent of loans with property inspection waivers, by balance. Source: RiskSpan Edge

Performance

Broadly speaking, PIW loans still pay significantly faster than loans with appraisals. In our June report, the differential was around 15 CPR for the wider cohort of borrowers. Since that time, the relationship has held steady. Loans with inspection waivers go up the S-curve faster than loans with appraisals, and top out around 13-18 CPR faster, depending on how deep in the money the borrower is.

Graph 2: S-curves for loans aged 6-48 months with balance >225k, waivers (black) vs inspection (blue). Source: RiskSpan Edge. 
 

The differential is smaller for purchase loans. The first chart, which reflects only purchase loans, shows PIW loans paying only 10-12 CPR faster than loans with full appraisals. In contrast, refi loans (second chart) continue to show a larger differential, ranging from 15 to 20 CPR, depending on how deep in the money the loan is.

Graph 3: Purchase loans with waivers (black) versus inspections (blue). Source: RiskSpan Edge.

Graph 4: Refi loans with waivers (black) versus inspections (blue). Source: RiskSpan Edge.

We also compared bank-serviced loans with non-bank serviced loans. The PIW speed difference was comparable between the two groups of servicers, although non-bank speeds were in general faster for both appraisal and PIW loans.

Inspection waivers have been around since 2017 but have only gained popularity in the last year. While investors disagree on what is driving the speed differential, it could be as simple as self-selection: a borrower who qualifies for an inspection waiver will also qualify upon refinancing, unless that borrower takes out a large cash-out refi which pushes the LTV above 70%[1]. In any event, the speed differential between loans with waivers and loans with full inspections continues to hold over the last four months of factor updates. Given this, appraisal loans still offer significantly better prepay profiles at all refi incentives, along with a slightly flatter S-curve, implying lower option cost, than loans with inspection waivers.

If you are interested in seeing variations on this theme, contact us. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


 

 

[1] No-cash-out refis qualify for waivers up to 90% LTV.


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