By the Numbers
FHA loans begin to show signs of credit stress
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. This material does not constitute research.
A canary is starting to chirp somewhere in the mortgage credit coal mine. The share of FHA loans at least 60 days delinquent now tops the tally at the start of the year. And except for the first phase of pandemic and the 2017 hurricanes, the pace of new 60-day delinquencies has reached the highest level of the last nine years, FHA borrowers typically make small down payments and have less disposable income than other borrowers, making them a good early indicator of stress. Growing delinquencies could make it less likely that the FHA will lower insurance premiums. And this could be an early warning sign that credit stress could increase in other sectors of the mortgage market.
More FHA loans in Ginnie Mae pools are delinquent than there were at the start of the year (Exhibit 1). The number of loans at least 60-days delinquent fell from fall 2020 through July 2022. Many borrowers cured their delinquencies while other loans were bought out of Ginnie Mae pools by servicers. But the share of delinquent FHA loans has been growing since July. In contrast, VA loan delinquencies bottomed out at the same time but have held steady since. VA borrowers typically are much stronger than VA.
Exhibit 1: More FHA loans are ≥60 days delinquent than at the start of the year
Delinquency rates for FHA loans in Ginnie Mae pools.
Source: Ginnie Mae, Amherst Pierpont Securities.
FHA delinquencies follow a seasonal pattern, falling in the spring and then ramping up throughout the year, so some increase is expected. However, the October level is typically lower than the January level (Exhibit 2). The only exception in nine years was due to the Covid-19 pandemic that started in 2020
Exhibit 2: FHA delinquencies are typically lower in October than January
Source: Ginnie Mae, Amherst Pierpont Securities.
The rate of new 60-day delinquencies is at the highest level in the nine years Ginnie Mae has been publishing loan-level data, with two exceptions (Exhibit 2). The first exception came with the 2017 hurricane season, which affected many FHA borrowers in Puerto Rico, among other locations. The second exception was at the start of the pandemic in 2020. Notably, VA loans are not showing a similar uptick in new delinquencies; the pace is a little lower than before the pandemic.
Exhibit 3: The pace of new FHA delinquencies is the highest in nine years
May and June 2020 are excluded to show more detail in other months. The percent of loans each month that move from 30-days to 60-days delinquent.
Source: Ginnie Mae, Amherst Pierpont Securities.
Servicer buyouts of delinquent loans and delinquent loan cures also contribute to the total number of delinquent loans in pools. The buyout rate has fallen this year in response to higher interest rates, which also contributes to the increase in delinquent loans. However, that was largely offset by a higher cure rate.
The FHA releases its annual review of its insurance fund in November using data from the end of September. Policymakers might turn cautious about lowering mortgage insurance premiums if the pace of defaults is shifting higher. And slower home price appreciation should also weigh on the health of the insurance fund. Lower insurance premiums would not hurt most Ginnie Mae MBS, most of which are trading well below part. But pools created in 2022 with higher coupons would be negatively affected by lower premiums, so this may prove to be a positive sign for those investors. Owners of interest-only bonds also benefit if insurance premiums are not lowered.
The pickup in new defaults is occurring for borrowers across the spectrum of credit scores (Exhibit 4). The largest pickup occurs for borrowers with credit scores between 650 and 700, but even borrowers with scores over 800 are defaulting faster than before the pandemic. One reason might be due to credit score inflation during the pandemic. Many pandemic relief policies suspended delinquency reporting to credit bureaus, which caused many borrowers’ credit scores to increase. Therefore, the score might not represent the true risk of those borrowers.
Exhibit 4: Borrowers with different credit scores are defaulting faster this year
Source: Ginnie Mae, Amherst Pierpont Securities.
Borrowers with higher loan-to-value ratios also tended to default faster compared to before the pandemic (Exhibit 5). Only borrowers with extremely low or high LTVs had similar default rates compared to times before the pandemic. Most borrowers with high mark-to-market LTVs have new loans and haven’t had as much time to get into financial difficulties.
Exhibit 5: Default rates increased more for borrowers with higher LTVs.
Source: Ginnie Mae, Amherst Pierpont Securities.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
