By the Numbers
High DQs, lower mortgage rates raise MBS buyout risk
This material is a Marketing Communication and does not constitute Independent Investment Research.
The risk of MBS servicers buying out delinquent loans from Ginnie Mae pools has increased following changes to the FHA’s loss mitigation rules last October. Many buyouts have been on hold while borrowers go through newly implemented trial payment plans prior to loan modification or partial claim. Several servicers have breached Ginnie Mae’s delinquency thresholds, which could force buyouts. And buyouts should pick up as borrowers start exiting trial plans over the coming months. Investors should be cautious about owning pools priced above par that have high delinquency rates and are serviced by entities near or above Ginnie Mae’s thresholds.
Delinquency rates have climbed sharply over the last few months (Exhibit 1). The new FHA rules put in place in October require borrowers to complete trial payment plans before receiving loss mitigation, which has lowered buyouts and cures. The worst-performing vintage—2022—is more than 12% delinquent. Many of these delinquencies almost surely will become buyouts as borrowers exit trials—successful trials for loan mods or failed trials that forces the borrower to move or face foreclosure.
Exhibit 1. FHA delinquency rates jumped after October loss mit rules change
Ginnie Mae 30-year fixed-rate MBS.
Source: Ginnie Mae, Santander US Capital Markets.
Servicers are also supposed manage the delinquency rates of loans in Ginnie Mae pools. Ginnie Mae measures servicers against three thresholds across their loans in Ginnie Mae MBS:
- “DQ2+”: The %60+ days delinquent should not exceed 7.5%.
- “DQ3+”: The %90+ days delinquent should not exceed 5.0%.
- “DQP”: The ratio of the total missed payments in the serviced portfolio to the total monthly payments amount should not exceed 60%.
The trial requirement has pushed several servicers over at least one of these limits (Exhibit 2). They could be forced by Ginnie Mae to conduct sufficient buyouts to lower these thresholds, although Ginnie historically has exercised discretion over enforcement of these limits. This may be happening now, too. Mortgage Solutions of Colorado, for example, is well over all three thresholds. Its % 60+ days delinquent is 18.8%, well above the 7.5% limit. Its % 90+ days delinquent is 15.3%, well above the 5.0% limit. And its DQP level is estimated to be 187.2%, well above the 60% limit.
Exhibit 2. Some servicers appear to be above the DQ thresholds.
DQ2+: The percent of loans at least 2 months delinquent; must not exceed 7.5%. DQ3+: the percent of loans at least 3 months delinquent; must not exceed 5%. DQP: the total missed principal and interest payments as a percent of the total monthly payments due; must not exceed 60%. Blue cells highlight thresholds that have been exceeded. DQ metrics estimated using Ginnie Mae loan-level data. Only servicers with at least $2 bn outstanding balance and have breached at least one threshold are included, and servicers must be too small to appear in Exhibit 3.
Source: Ginnie Mae, Santander US Capital Markets.
The largest servicers are generally below the thresholds, but many are close to breaching the “DQ3+” limit (Exhibit 3). For example, Freedom Mortgage is currently 4.6% 90+ days delinquent and the limit is 5.0%. Half of the listed servicers are at least 4.5% 90+ days delinquent. New American Funding and Idaho HFA and each breached the 60+ days delinquent limit.
Exhibit 3. Several larger services are near the thresholds
DQ2+: The percent of loans at least 2 months delinquent; must not exceed 7.5%. DQ3+: the percent of loans at least 3 months delinquent; must not exceed 5%. DQP: the total missed principal and interest payments as a percent of the total monthly payments due; must not exceed 60%. Blue cells highlight levels within 1% of the DQ2+ or DQ3+ limit, or within 10% of the DQP limit. DQ metrics are estimated using Ginnie Mae loan-level data.
Source: Ginnie Mae, Santander US Capital Markets.
These tables show estimates of the DQ2+, DQ3+, and DQP ratios using Ginnie Mae’s loan-level securities data; these are not numbers directly published by Ginnie Mae. It is possible there are differences in how Ginine Mae calculates them using internal data. But any differences, especially for the DQ2+ and DQ3+ ratios, seem likely to be small.
Overall buyout rates have been relatively stable, but the reason for buyout changed after the October rules change (Exhibit 4). The dashed red line shows buyouts for loan modifications, which fell sharply after October as borrowers started trial payment plans. The solid blue line, which shows optional buyouts, started to increase as mortgage rates dropped and servicers like AmeriHome started to exercise this option more frequently.
Exhibit 4. FHA loss mitigation buyouts dropped after October, but EBOs increased
Ginnie Mae 30-year fixed-rate MBS.
Source: Ginnie Mae, Santander US Capital Markets.
Loan cures, which do not prepay, also dropped sharply after October (Exhibit 5). These include borrowers that receive partial claims or receive payment supplements and borrowers that cure without assistance. The October rules change requires borrowers to complete payment plans for partial claims and payment assistance. Therefore, those borrowers remain delinquent during the trial period, lowering the cure rate. But cures should pick up as the first wave of borrowers completes their trials, which may explain the higher number of cures in February.
Exhibit 5. Loan cures, including partial claims, slowed sharply after October
A loan cure is counted if the loan is at least 60 days delinquent and becomes zero days delinquent the next month. Ginnie Mae 30-year fixed-rate MBS.
Source: Ginnie Mae, Santander US Capital Markets.
Prior to the rules change, some borrowers were able to receive multiple partial claims in a short period. After the rules change, borrowers are limited to one partial claim in a 24-month period. This should lower the cure rate and lift the buyout rate—a borrower that used to serially default and cure would not prepay. But now that borrower will be forced to sell the home or be foreclosed—a prepayment.
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