Forbearance requests slow sharply in legacy RMBS
admin | June 26, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Based on an early read of June remittance data, it appears the number of legacy private MBS borrowers either newly entering forbearance or falling behind on a first payment fell drastically in May. The pace of delinquency increases and forbearance uptake fell by roughly 50% month-over-month, driven by outsized declines in larger loans and loans in areas that have seen the most impact from COVID-19.
While still very much an incomplete picture, delinquency rates and forbearance uptake by legacy borrowers slowed precipitously this month across all flavors of legacy RMBS. Prime and subprime loans saw the biggest slowdowns with the drop in prime loans led by larger balances. Somewhat surprisingly, forbearance requests fell sharply as well in states most affected by the virus such as New York and New Jersey, where forbearance uptake fell roughly in line with Texas, Florida and Nevada.
Based on early remittance data across roughly 20% of the legacy universe, the amount of loans entering forbearance in May either through delinquency or capitalization of a missed payment fell by roughly 50% month-over-month. May remittance data that reflected the April payment cycle showed that the amount of borrowers entering forbearance plans increased between 12% and 14% across legacy RMBS cohorts. That number fell to between 5.5% and 8% in this month’s remittance. Forbearance uptake fell equally across prime and subprime cohorts as the amount of loans entering forbearance fell by 7.5%, representing a 57% decline across both credits. Conversely Option ARM collateral saw a modestly smaller slowdown in roll rates as they fell from roughly 14% to 8% over the two-month period. (Exhibit1)
Exhibit 1: Forbearance uptake falls across legacy credits in June
Forbearance trends by loan balance
Much has been made of the lower levels of forbearance in smaller balance loans as there has been significant discussion of the possibility that fiscal stimuli such as the PPP program, increased unemployment benefits and stimulus checks have helped to keep levels of forbearance low for borrowers with more affordable payments (here). Government support would help more in servicing lower nominal amounts of debt than larger ones. One alternative theory on the disproportionately large forbearance uptake in higher loan balances is that higher cost states and cities have borne the brunt of the virus’ impact as areas like New York and New Jersey have been disproportionately impacted relative to other lower cost areas of the country.
Even with these programs still in place, the disparity in forbearance uptake between lower and higher balance loans converged significantly this month as uptake rates on higher loan balance loans fell dramatically in June. Forbearance uptake fell by more than 60% month-over-month on loans with balances between $600,000 and $1,000,000. However, forbearance uptake rates on super-jumbo balance loans remained elevated relative to almost all other cohorts (Exhibit 2).
Exhibit 2: Forbearance uptake begins to converge across loan size
Additionally, if it is the case that existing fiscal stimulus is driving lower rates of forbearance across lower loan balance loans, it seems plausible that as these programs expire, there may be a significant spike in forbearance uptake by lower loan balance borrowers as these benefits are no longer available to aid borrowers. In that instance, forbearance uptake on lower loan balance loans may in fact begin to increase in-line with peak forbearance rates seen last month in higher loan balance loans.
Forbearance trends by geography
Surprisingly, forbearance requests converged to roughly 6% nominally in this month’s remittance across all major states. New York, which saw 21% of previously current borrowers either transition to delinquency or receive a capitalization modification in last month’s remittance, saw that number fall to just 6.9% this month, representing a roughly 70% decline month-over-month. The swift and steep decline in forbearance requests in New York comes as somewhat of a surprise given the broad shutdown of large portions of the state’s economy through May. New Jersey saw a similar decrease in this month’s remittance while other major states saw a roughly 50% decline. (Exhibit 3)
Exhibit 3: Forbearance requests normalize across states this month
With the obvious caveat that these are still increases in the absolute levels of delinquencies and the fact that this 20% may not be a representative sample of the broader legacy universe, the material slowdown in forbearance uptake, especially in states hardest hit by COVID-19, appears to be a positive data point for investors in the legacy sector. Fundamental performance will ultimately be driven by what percentage of these borrowers cure and re-perform after exiting their forbearance plans. However, given the large stores of built up borrower equity in the legacy sector coupled with relatively strong home price performance over recent months, it seems likely that the impact to the sector may be quite muted especially relative to certain other areas of mortgage credit.