By the Numbers
FHA policy change likely to lift Ginnie Mae prepayments
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Ginnie Mae prepayment speeds look likely to increase after planned changes to the Federal Housing Administration’s handling of delinquent loans take effect in October. This would lift the value of pools priced below par and lower the value of pools priced above par. Lenders will not be able to use loss mitigation measures for the many borrowers that redefault within 24 months of receiving loss mitigation, a change likely to force these borrowers to move or go into foreclosure. The number of borrowers that redefault is growing and could raise FHA speeds 5 to 10 CPR in many cohorts if those loans are forced to prepayFirst time delinquencies have been running roughly 6% to 8% annually for FHA loans (Exhibit 1, dark solid line). The light solid line shows that up to 4% of loans are also becoming at least 60 days delinquent for the second time, a pace that grew steadily during 2022 and 2023. But the two dashed lines show that most of these loans do not prepay while they are delinquent. The gap between the transition rates and prepayment rates is a sign that many of these loans are curing.
Exhibit 1. FHA transitions into delinquency and subsequent prepayments
FHA loans in Ginnie Mae 30-year fixed-rate MBS. Excludes modified loans. The second-time cures exclude loans that are more than 24 months seasoned after the first cure. A loan is only considered to cure if it goes from ≥60-days DQ to current in one step.
Source: Ginnie Mae, Santander US Capital Markets.
If loans that default a second time are unable to receive loss mitigation assistance from the FHA, then a prepayment is likely. The borrower could be forced to sell the house and move, enter foreclosure, or submit the deed in lieu of foreclosure. And Ginnie Mae places limits on the number of delinquent loans each servicer can keep in its MBS. At the extreme, if all the redefaults quickly prepay, then speeds would increase by the amount of the redefault rate. In other words, if 4% of loans are defaulting a second time, then speeds would jump by 4%.
The speed increase will vary by cohort (Exhibit 2). This shows the average annual transition rate of second-time defaults over the last 12 months for cohorts with at least $1 billion outstanding. For example, the 2022 vintage FHA loans could have prepayments increase by 6.8 CPR, and over 8 CPR in 6.5%s and 7%s.
Exhibit 2. Potential FHA buyout rate increases by cohort
Speeds assume 100% FHA collateral.
Source: Ginnie Mae, Santander US Capital Markets.
There are some caveats to the analysis that could soften the projected effect. Ginnie Mae does not identify loans that have received loss mitigation, so this estimate will capture some borrowers that recovered without assistance. Those loans would still be eligible for loss mitigation after a redefault. Also, loans that are close enough to the 24-month threshold may be able to use short-term forbearance to season back into eligibility for permanent loss mitigation.
Pools with modified loans, and especially ET pools that contain only modified loans, are also likely to have speeds pickup since those loans have very high redefault rates.
Permanent loss mitigation includes partial claims, loan modifications and payment supplements. Short term repayment plans and forbearances are not considered permanent so remain available for repeat use but will only be effective for a subset of defaulted borrowers.
The FHA also stated it planned to review the effectiveness of the payment supplement loss mitigation option introduced last year. Removing that would likely increase buyouts further on discount pools. The loss mitigation waterfall was simplified, removing options specific to Covid, but still retains the core offerings of a partial claim, loan modification and payment supplement.
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