From end-of-month June to end-of-month July, the MIAC Generic Servicing Assets (GSAs™) Conv_30 Index decreased by 5.05%, and the GNII_FHA_30 Index decreased by 0.57%.
During the month of July, Conv_30 Index OAS’s tightened to close the month at 1,258.3 bps, for a decrease of 36.4 bps. The GNII_FHA_30 Index OAS’s tightened to 1,571.8 bps, for a month-over-month decrease of 64.9 bps. For the month, MIAC’s Primary Mortgage Rate was lower by nearly 23 bps, but the impact was partly offset by the steadily improving unemployment that, if sustained, will result in fewer lifetime defaults vs. the often-dire predictions at the onset of the pandemic.
Figure 1: Month-over-Month Pricing Change by Product Source: MIAC Analytics™
While prevailing market conditions have not been kind to MSR values, for many origination gains are helping to offset the blow caused by MSR values that year-to-date are down by over 34%. If not for the extreme appetite for mostly Agency MSRs, values would be lower. Simply put, there is an abundance of large servicers that out of preservation of their economies of scale require a lot of fuel, or in this case MSRs, to offset record amounts of prepayments. Even more impactful is the amount of value that buyers attribute to retention or the ability to refinance or cash-out refinance a borrower at unprecedented margins. In either case, the need for scale and the insatiable appetite for recapture rich portfolios are playing a heavy role in how MSRs trade.
Figure 2: Year-to-Date Pricing Change by Product Source: MIAC Analytics™
The share of US mortgage borrowers in a state of forbearance peaked in early June at 8.5% and has been showing slow but steady improvements in each week thereafter. According to the latest MBA statistics, coronavirus-related forbearance activity is now lower for the 9th consecutive week, most recently dropping 23 bps between August 3rd and August 9th. Roughly 3.6 million or 7.21% of all outstanding borrowers were in forbearance. The share of conforming mortgages in forbearance dropped from 5.19% to 4.94% in the latest weekly report while FHA, VA, and USDA products fell 52 bps to 9.54% from 10.06%. Before getting overly upbeat about the decline in Ginnie Mae loans in forbearance, with more borrowers requesting forbearance than exiting forbearance, recent improvements are due to buyouts of delinquent loans from Ginnie Mae pools. Private-label securities and portfolio loans rose in the MBA’s latest report from 10.34% from 10.12%. Again, this is largely due to Ginnie Mae buyouts transitioning from the FHA, VA, and USDA categories into the portfolio category.
Remember five months ago when many anticipated slower prepayments due to the percentage of borrowers in forbearance? If slower, I would hate to see what fast prepayments look like. For the month of July, 30-year conventional MBS prepaid at an annualized rate of 34%. This is up slightly from June and can once again be blamed on record-low mortgage rates and an improving housing market. At 52% and 51% respectively, CPRs for 2019 vintage 3.5% and 4.0% exceeded the prepayment rate of the higher coupon 4.5% and 5.0% assets as buyers in the higher coupon pools generally have lower credit scores and are more likely to endure pandemic-related hardship. Amazingly, even the 2.5% coupon cohort is now highly refinancable reaching a 37% CPR in July.
On August 6th the Freddie Mac PMMS rate hit an all-time low of 2.88%, and while some recent volatility now has the rate at 2.96%, primary-secondary spreads remain elevated. Primary-secondary spreads as measured by the difference between the 30-year primary mortgage rate and current coupon par MBS rate are still 60 bps above the start-of-the-year level. Any normalization of this spread could put downward pressure on mortgage rates further boosting refinance volumes. As mortgage originators are aware, the huge ramp-up in demand for refinancing created a bandwidth problem for the mortgage industry. To varying degrees firms lacked the capacity to process the increased volume of loan applications partly due to the disruption caused by the virus. Additionally, the bulk and the co-issue market for mortgage servicing rights was barely clinging to life. Servicing rights serve as collateral and help independent mortgage companies get liquidity. When mortgage servicing rights stopped trading, many not only lost access to the liquidity afforded by the lines of credit but to add insult to injury, were faced with margin calls. In summary, lenders had to maintain very wide spreads and this resulted in higher rates.
Now that mortgage servicing rights are trading again, for many that source of liquidity has returned and the need to keep spreads wider is gone. To repeat, any regression to the mean on spreads could cause mortgage rates to fall from their current levels.
Adverse Market Fee
Announced on August 12th and applied to all refinance mortgages with settlements dates on or after September 1, 2020, both Fannie Mae and Freddie Mac will begin charging a 0.5% adverse market fee (Research Insights: The Impact of the Agency’s New Adverse Market Fee) on most refinances (including both cash-out and rate-term refinances). Both Fannie and Freddie requested and were granted permission from the FHFA for the change which the GSE’s implemented as a result of risk management, and lost forecasting precipitated by COVID-19-related economic and market uncertainty. Importantly, this fee is not applicable to purchase loans. The Mortgage Bankers Association estimates that the fee will amount to around $1,400 per loan on average. Critics argue that the pricing increase will be particularly harmful to our nation’s low-and-moderate-income homeowners and for the emerging, but unsteady, improvements to the national economy.
Regardless of any opinions, you might have about the fee or its timing, the fee will be positive for pass through security and MSR values alike. Assuming that this price adjustment is fully passed on to borrowers, a 50 BP price adjustment equates to a 12-14 BP note rate increase for 30-year Agency loans. The impact on 15-year Agency loans will be slightly higher at 14-18 BPs – given their shorter duration. This rate increase will reduce refinance-based prepayments (and the resulting retention benefit) by 2-6% annually – depending upon how far in-the-money the borrower is.
Ginnie Mae Re-Pooling Policies
In June, Ginnie announced new changes to its re-pooling policies. Effective from the time of the announcement, Ginnie now prohibits loans that were in forbearance at any time on or after March 1, 2020, and were purchased out of a Ginnie pool on or after July 1, 2020, from being re-securitized into any existing Ginnie pool type. Should the loans cure at some point in the future, they will only be eligible collateral for a new type of Ginnie custom pool (“C RG” pools). In order to qualify for re-securitization, borrowers must have made timely payments on the loan for at least six months prior to the issuance date of the “C RG” pool, and the issuance date of the new pool must be at least 210 days from when the loan was last delinquent.
Due to the availability of capital, bank servicers tend to be way more active in buying out 90+ delinquent Ginnie Mae loans than non-depositories. While we anticipate that higher Ginnie Mae delinquencies will result in a greater number of buyouts among the larger national and regional banks, due to the large concentration of Ginnie Mae MSRs at the non-depositories, the jump in Ginnie buyout speeds will be far less as fewer non-banks engage in early buyouts due to the lengthened period of time that their capital will need to be tied up.
MSR Liquidity Update
In 2019, an estimated $635 billion in principal balance transferred on Fannie Mae, Freddie Mac, and Ginnie Mae MSR bulk transactions. As concerns, or in some cases outright panic, set in over the impact of the ongoing pandemic, many buyers and sellers went into hibernation mode. Respectively, an estimated $107 billion and $57 billion in bulk MSR transactions transferred in the first and second quarters of 2020. Many sellers chose to sit on the sidelines for avoidance of selling at levels that in some instances implied a 30% or greater yield (in favor of the buyer). Numerous buyers stopped buying due to liquidity concerns borne from falling MSR values, shrinking or non-existent lines of credit, and advance requirements that until the FHFA announcement limiting MBS advances to 120 days, made it difficult to ascertain the amount of cash-on-hand servicers, and more specifically non-depositories might require to fulfill their servicing obligations. After key announcements from FHFA and Ginnie Mae’s PTAP, the market began to show some signs of life. Larger Agency offerings of $3 billion and greater are the focus for many larger buyers and have been attracting as many as 15-20 interested parties with 50% or more of those firms submitting bids. Ginnie Mae offerings are not attracting nearly as much attention but are showing substantial improvement.
The prices being paid on Bifurcated and Non-Bifurcated Co-Issue have dramatically improved too. At the onset of the pandemic, in some instances, buyers artificially set their par rates to 2% or less and communicated to their clients that no purchase price would be paid on any MSRs where the note rate on their MSRs was more than 100 bps higher than their stated par rate. Some who lacked the trifecta of having correspondent relationships, co-issue relationships, and retention capabilities were in some instances forced to give away their MSRs for free, but that did not last very long. As in the bulk market, buyers returned as they gained confidence in their ability to project advances, and for the preservation of market share were raising their prices on a weekly basis to stay competitive. While still significantly less than the value offered in 2018 and 2019, Co-issue prices are dramatically improved over the panic-stricken levels being offered in March and April, and for some are proving to be a popular alternative to MSR retention.
MIAC’s MSR Valuation department provides MSR valuation advisory services to over 200 institutions totaling nearly $2 trillion in residential and commercial MSR valuations every month.
Residential MSR Market Update – July 2020
Mike Carnes, Managing Director, MSR Valuations Group