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Articles Tagged with: RS Edge

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.

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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.


How Buyouts Drive Ginnie Mae Prepayment Speeds

Because Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. government, investors are not subject to credit losses. However, the potential for non-performing loan buyouts creates an additional layer of prepayment risk. As with any prepayment, investors receive the unpaid principal balance of the loan that goes through buyout. However, for all 30-year pass-throughs with 3% and higher coupons trading above par, any prepayment (due to a buyout or otherwise) represents a loss to the investor.

So how much of a concern are buyouts for investors?

Prepayments

Prepayments for Ginnie Mae MBS are comprised of a voluntary component (the conditional repayment rate, CRR) along with an involuntary portion (the conditional buyout rate or CBR). Since FHA and VA loans, the primary collateral backing Ginnie Mae MBS, typically behave differently, we analyze their performance separately. The analysis that follows is based on all 30-year FHA and VA loans originated since 2014 that are included in Ginnie Mae pools. The chart below illustrates the dramatic convergence in speeds relative to the end of 2016 when VA loans were paying 7% to 8% faster than FHA loans.

delinquencies and buyouts.PNG

Deconstructing the overall prepayment rate reveals that the convergence is due to both a narrowing of the CRR difference along with a spike in the CBR for FHA loans beginning in June of this year.

Serious delinquencies are a leading indicator of future buyouts. Comparing the percentage of 90-day (or more) delinquencies as a percentage of the outstanding balance indicates a fairly consistent difference (54 bps on average) between FHA and VA loans, with both trending upward.

delinquencies and buyouts.PNG

Aging Effects

If we further stratify the loans based on vintage and look at the patterns as the loans age, will there be any material differences?

The 2014 vintage FHA cohort has performed poorly based on the buyout rate relative to the newer vintages. The 2016 vintage appears to be aging in a similar manner to the 2015 vintage while the early results for the 2017 cohort place it somewhere between the 2014 and 2015 vintages. All of the VA vintages have experienced fewer buyouts than their FHA counterparts. The 2016 VA cohort is the standout thus far followed by the 2015 and 2014 vintages. With only a few months of data to go on, the 2017 VA loans are outperforming the 2014 and 2015 loans, but are not as stellar as the 2016s.

delinquencies and buyouts.PNG

The patterns largely carry over to the 90-day or more delinquencies. 2014 vintage FHA loans generally show the highest serious delinquency percentage at any given age. However, the 2015 cohort has experienced a sharp uptick beginning at 27 months and, at an age of 31 months, exceeds the 2014 level. VA loans do not exhibit a meaningful difference among the vintages.

delinquencies and buyouts.PNG

Conclusion

Buyouts should be a consideration for Ginnie Mae investors, particularly for FHA loans. The analysis has shown that buyout rates are significantly higher for FHA loans relative to VA loans. With the CBR for FHA loans averaging 3.2x higher than the VA CBR over the last twelve months it needs to be factored into the investment equation.


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