The year 2020 will be remembered by the U.S. mortgage industry with a mixture of emotions. It was a very difficult year in terms of dealing with COVID, but also an extraordinary year in terms of record production going back to 2004. The industry saw record profit margins as the year began, albeit with secondary market spreads shrinking as more capacity came online.
The folks on the Federal Open Market Committee have made it clear that they are going to continue buying mortgage-backed securities at a roughly $100 billion per month rate. Between now and year end, the FOMC will buy almost $60 billion in MBS for the System Open Market Account.
The Fed’s massive purchase of mortgage debt means that the low interest rate environment that has propelled the industry to record levels will continue for the next several years. And so long as demand for homes and mortgage financing holds steady, the industry is likely to avoid serious credit problems — outside of the glaring exception of the Cares Act and related costs due to government-mandated forbearance.
One of the fundamental rules of secured finance is that the collateral follows the mortgage note. So long as the value of the collateral is stable or, in the case of today’s market, rising steadily, the note holder is protected. This does not mean that mortgage servicers and investors will not encounter problems, but is does mean that loss given default generally for the industry is likely to be extremely low.
This statement may surprise some people. Delinquency rates are on Federal Housing Administration loans as of the third quarter. FHA delinquency is now at 15.8% nationally. Different states have higher, decidedly subprime, delinquency levels, with New York at 17.56%, Texas at 18.29%, Maryland at 18.56%, Louisiana at 19.56% and New Jersey at 20.01%.
Yet what is interesting about these numbers, is that the rate of delinquency tends to cure before the loans go beyond 90-days past due, much less to foreclosure. By comparison, conventional loans are showing delinquency in high single digits and bank-owned loans are below 2%.
And in every category of one-to-four-family loans, actual net charge-off and foreclosure rates remain low, even falling. More important, for bank portfolios and conventional loans, loss given default is near zero or even negative. Why? Because of the generosity of Chairman Jerome Powell and the FOMC.
Mortgage lending and servicing is an interest rate sensitive business. In the post-COVID world, where the Fed is now maintaining a balance sheet of approximately $7 trillion plus, the obvious conclusion is that lending volumes and home prices are likely to remain strong for the next several years. Think of 2020 as the bottom of home prices for this cycle, with a big home price correction likely in 2024 or after. Time to buy a house, folks.
The fact of low or even falling interest rates in the US means that many loans today marked “delinquent” are likely to be resolved short of foreclosure. Part of this positive trend is due to the interest rate environment and part is because of the greatly improved skills of the mortgage industry.
But these facts do not prevent some uninformed souls from creating a lot of unrealistic scenarios about market risk. As
For example, the Financial Stability Oversight Council, encouraged by Federal Housing Finance Agency Director Mark Calabria, continues to fret over the potential risk from nonbank mortgage servicers. Not lenders, highly leveraged hybrid REITs or NPL-buying funds, mind you, but mortgage servicers.
There is nothing in the public record going back 50 years to suggest that the failure of nonbank mortgage servicer poses a systemic risk to the U.S. economy, or a hazard to consumers, yet the bureaucrats led by Calabria persist in their ill-informed musings.
Take another example, namely loans guaranteed by the Veterans Administration. Morgan Snyder, owner of CAllc Research Publications in New York, recently argued in National Mortgage News (“
A lot of people in and outside Washington worry that the fact of VA loans being eligible for a “streamline” refinance is creating risk for the taxpayer, risk similar to that fiasco whereby the FHA has been bleeding due to poor or no appraisals on reverse HECM loans. But in fact, the streamline refinance of FHA and VA loans, which are mostly rate and not cash-out refinance transactions, reduces risk.
VA interest rate reduction refinance loans, as the streamline product is known, require no income verification, a mortgage-only credit check, no maximum loan-to-value, and no appraisal. Some observers worry that the LTV rates on IRRRL loans could be well over 100%. Yet as with the
First, VA loans have the lowest foreclosure rates of all US loans, according to the MBA’s National Delinquency Survey. VA-guaranteed loans have a foreclosure rate of only 1.98% versus prime loans with a foreclosure rate of 2.47%. This is better credit performance than bank loans.
Why? Because our men and women in uniform tend to take their financial obligations seriously. Also, loan servicers go out of their way not to foreclose on soldiers. They know that when a soldier does get into trouble, they can reach out to the VA and get an immediate response.
But more important, the concerns raised regarding nonbanks and with respect to markets like FHA and VA loans ignores the powerful and obvious impact of the FOMC’s aggressive interest rates policy on asset values. Or stated differently, bank and nonbank servicers don’t acquire early buyouts from Ginnie Mae pools to lose money. FHA and VA loans are not the favorite assets of all servicers, but they are not a source of taxpayer risk. Some high touch servicers even like distressed government insured assets.
Say a servicer buys out a delinquent FHA or VA loan out of a Ginnie Mae pool, and say that the agencies decline to take the house. You collect the reimbursement of principal and expenses, fix the asset and sell the house into a rising market. The more skillful distressed servicers will break even or perhaps make money on this transaction.
Instead of looking for risk where none exists, regulators led by the Fed, FSOC and FHFA should be embracing an expanded streamline refinance for conventional and bank-owned loans. Just copy the existing programs at FHA and VA. Lowering household expenses for housing improves credit, protects taxpayers and consumers and will help the economy recover from the terrible effects of COVID.
Yes, we’ll have another nasty housing market correction in a couple of years, but that is the Fed’s doing and not a problem created by nonbank mortgage companies or their regulators. Ponder that and have a very safe and happy holiday.
