Originations and Issuances, by the Numbers
New mortgage originations reached $474 billion in Q2 2019, up from $437 billion in Q2 2018 (an 8.5% increase), according to data from the Federal Reserve Bank of New York. Housing debt climbed to $9.41 trillion in Q2 2019, up from $9.00 trillion versus a year ago (an increase of 4.6%). Housing debt remains the leading source of consumer debt in the United States at 68% of the $13.86 trillion in national household debt.
In Q2 2019, 9.57% of mortgage originations were to borrowers with credit scores below 660, up from 8.49% in Q2 2018. Although subprime originations are creeping up, they are still very low when compared with the pre-financial crisis high of 25.61% in Q1 2007.
RMBS issuance increased by 63% in 2018. Much of this can be attributed to the rise of non-qualified mortgage (non-QM) loans, which are often characterized by risky features and obtained by borrowers with weaker credit profiles. Non-QM mortgage issuance reached $5.7 billion in Q1 2019, representing half of 2018’s total volume, and is expected to reach up to $20 billion in 2019. A growing proportion of these loans are alternative documentation (alt-doc) mortgages. In fact, Fitch estimated that around half of the non-QM issuance in 2019 will comprise alt-doc mortgages, (up from 28% in 2017). Fitch is exercising a “cautious approach to these loans” due to their limited history, but noted that “alt-doc loans performance to date has been strong.”
Performance and Practices
In Q2 2019, .87% of mortgage balances were 90+ days delinquent, versus 1.11% a year ago – lower than delinquencies for auto loans, student loans and credit cards, and well below peak levels of 8.89% in Q1 2010. That said, delinquencies for home equity loans and home equity lines of credit are on the rise. This has been attributed to a number of factors, including higher interest rates, consumer preference for refinance options and banks losing business to nonbank lenders.
Earlier this year, Angel Oak Capital Advisors completed a record $609 million securitization of non-QM affiliated originator loans – the largest transaction of its kind since the 2008 housing crisis. Lender and investor confidence in the non-QM market is growing – a number of lenders, including New American Funding and Plaza Home Mortgage, are moving into the space, and 360 Mortgage Group recently launched a no-income, no-asset pilot program for non-owner occupied investment properties.
We would expect Federal Reserve interest rate cuts and historically low unemployment rates to have a positive impact on RMBS performance. In addition, the Federal Housing Finance Agency’s decision to merge Fannie Mae and Freddie Mac’s securitization programs into a Uniform Mortgage-Backed Security has the potential to increase RMBS trading volume and positively affect interest rates for borrowers.
Meanwhile, the Trump Administration is forging ahead with housing finance reform, and a report reevaluating Fannie and Freddie’s conservatorship status is anticipated later this year. The “patch” exemption, which allows loans eligible for purchase or guarantee by Fannie or Freddie with DTI ratios over 43% to benefit from QM status, is set to expire in January 2021. The Center for Responsible Lending has recommended a revised rule, which would focus on compensating factors rather than DTI.
In the absence of further action, mortgage volume and home prices could be negatively impacted, and demand for the non-QM market and riskier products may further increase. New guidelines introduced by the Federal Housing Administration (FHA) will make condo purchases available for lower down payments, and point to a resurgence of FHA mortgages for low income borrowers, which had previously declined after the housing crisis.
This, together with the rise in popularity of non-QM and alt-doc loans, are trends to watch. These loans are believed to be protected by higher credit enhancements and more robust underwriting features, such as greater income documentation requirements, but the echoes from subprime’s past should not be ignored.
Emily Hatchett, a paralegal in the Insolvency, Creditor’s Rights and Financial Products Group, assisted with this post.