RiskSpan’s Vintage Quality Index, which had declined sharply in the first half of the year, leveled off somewhat in the third quarter, falling just 2.8 points between June and September, in contrast to its 12 point drop in Q2.
This change, which reflects a relative slowdown in the tightening of underwriting standards reflects something of a return to stability in the Agency origination market.
Driven by a drop in cash-out refinances (down 2.3% in the quarter), the VQI’s gradual decline left the standard credit-related risk attributes (FICO, LTV, and DTI) largely unchanged.
The share of High-LTV loans (loans with loan-to-value ratios over 80%) which fell 1.3% in Q3, has fallen dramatically over the last year–1.7% in total. More than half of this drop (6.1%) occurred before the start of the COVID-19 crisis. This suggests that, even though the Q3 VQI reflects tightening underwriting standards, the stability of the credit-related components, coupled with huge volumes from the GSEs, reflects a measure of stability in credit availability.
Risk Layers – September 20 – All Issued Loans By Count
Risk Layers – September 20 – All Issued Loans By Count
Analytical And Data Assumptions
- Monthly data for Fannie Mae and Freddie Mac.
- Loans originated more than three months prior to issuance are excluded because the index is meant to reflect current market conditions.
- Loans likely to have been originated through the HARP program, as identified by LTV, MI coverage percentage, and loan purpose are also excluded. These loans do not represent credit availability in the market as they likely would not have been originated today but for the existence of HARP.
- Freddie Mac data goes back to 12/2005. Fannie Mae only back to 12/2014.
- Certain fields for Freddie Mac data were missing prior to 6/2008.
GSE historical loan performance data release in support of GSE Risk Transfer activities was used to help back-fill data where it was missing.
An outline of our approach to data imputation can be found in our VQI Blog Post from October 28, 2015.
In the past two months, investors have seen outsized buyouts of delinquent loans from GNMA pools, leading to a significant uptick in prepayment speeds. Nearly all of these buyouts were driven by bank servicers, including Wells Fargo, US Bank, Truist, and Chase. GNMA buyout speeds in July’s report were the fastest, with Wells Fargo leading the charge on their seriously delinquent loans. The August report saw lower but still above-normal buyout activity. For September, we expect a further decline in bank buyout speeds, as the 60-day delinquent bucket for banks has declined from 6.6% just prior to the July report to 2.2% today.
During that same time, buyouts from non-banks were nearly non-existent. We note that the roll rate from 60-day delinquent to 90-day delinquent (buyout-eligible) is comparable between banks and non-banks. So buyout-eligible delinquencies for non-banks continue to build. That pipeline, coupled with the fact that non-banks service more than 75% of GNMA’s current balance, presents a substantial risk of future GNMA buyouts.
As discussed in previous posts, the differential in buyouts between banks and their non-bank counterparts is mainly due to bank servicers being able to warehouse delinquent loans until they reperform, modified or unmodified, or until they can otherwise dispose of the loan. Non-bank servicers typically do not have the balance sheet or funding to perform such buyouts in size. If these large non-bank servicers were to team with entities with access to cheap funding or were to set up funding facilities sponsored by investors, they could start to take advantage of the upside in re-securitization. The profits from securitizing reperforming loans is substantial, so non-bank servicers can afford to share the upside with yield-starved investors in return for access to funding. In this scenario, both parties could engage in a profitable trade.
Where do delinquencies stand for non-bank servicers? In the table below, we summarize the percentage of loans that have missed 3 or more payments for the top five non-bank servicers, by coupon and vintage. In this table, we show 90-day+ delinquencies, which are already eligible for buyout, as opposed to the 60 day delinquency analysis we performed for banks, where 60 day delinquencies feed the buyout-eligible bucket via a 75% to 80% roll-rate from 60-day to 90-day delinquent.
In this table, 2017-19 vintage GN2 3.5 through 4.5s show the largest overhang of non-bank delinquencies coupled with the largest percentage of non-bank servicing for the cohort.
We summarize delinquencies for the top five non-bank servicers because they presumably have a better chance at accessing liquidity from capital markets than smaller non-bank servicers. However, we observe significant build-up of 90-day+ delinquency across all non-bank servicers, which currently stands at 7.7% of non-bank UPB, much higher than the 6.6% bank-serviced 60-day delinquency in June.
Within the top five non-bank servicers, Penny Mac tended to have the largest buildup of 90-day+ delinquencies and Quicken tended to have the lowest but results varied from cohort to cohort. In the graph below, we show the 90+ delinquency pipeline for all GN2 30yr multi-lender pools.
While we cannot say for certain when (or if) the market will see significant buyout activity from non-bank servicers, seriously delinquent loans continue to build. This overhang of delinquent loans, coupled with the significant profits to be made from securitizing reperforming loans, poses the risk for a significant uptick in involuntary speeds in GN2 multi-lender pools.
 For this analysis, we focused on the roll rate for loans in 30yr GN2 Multi-lender pools vintage 2010 onward. See RiskSpan for analysis of other GNMA cohorts.
 Over the past two months, 77% of bank-serviced loans that were 60-days delinquent rolled to a buyout-eligible delinquency state compared to 75% for non-banks.
 This analysis was performed for loans that are securitized in 30yr GN2 multi-lender pools issued 2010 onward. The top five servicers include Lakeview, Penny Mac, Freedom, Quicken, and Nationstar (Mr. Cooper).
 Reperforming loans could include modifications or cures without modification. Even with a six-month waiting period for securitizing non-modified reperforming loans, the time-value of borrowing at current rates should prove only a mild hinderance to repurchases given the substantial profits on pooling reperforming loans.