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.

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. 

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 loans, others, 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.