The May 2023 edition of At a Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing data, shows the GSE first-lien origination share at 43.0 percent in Q1 2023, down 20 percentage points year-over-year. In addition, it shows low overall mortgage origination volume in Q1 2023 amid rising rates, and most loans originated in 2018 or later having successfully exited COVID-19 forbearance, despite the D180+ rate for these originations running about 1999-2003 levels. It also explores FHFA’s loan level price adjustments (LLPAs), which are now fairer, but will only result in a better execution than FHA for a marginal number of borrowers, and includes a special feature on loan-level GSE credit data.

Also inside this issue:

• Amid rising rates, mortgage origination volume totaled $290 billion in the first quarter of 2023, versus $725 billion for the same period in 2022. (Page 8)
• House prices are now flat year-over-year, according to Black Knight data from April 2023. (Page 22)
• While the D180+ rate for the 2018 and later originations are running above 1999-2003 levels, most of these loans have successfully exited COVID-19 forbearance. (Page 24)

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Adjusted LLPAs more fair, but won't win over many FHA borrowers

Despite recent fluctuations, private spending on home improvements has risen sharply since 2019. Traditionally, home improvements, like remodeling, occur around a sale transaction as a seller prepares the home for listing or when a new homebuyer wants to personalize their home.

FHFA’s new May 1 loan level price adjustments (LLPAs) better reflect expected losses and reduce cross-subsidies across effected GSE loans. It appears the new LLPAs are fairer and will benefit high LTV borrowers for whom FHA is not an option, but they only result in a better execution than FHA for a marginal number of additional borrowers.

The chart below compares old (dotted yellow line) and new LLPAs (black line). Some loans, especially high LTV loans and loans with lower credit scores, appear to have been overpaying before, and cross-subsidizing others. The new LLPAs are more linear and align better with losses (blue bars).

Why the changes?
FHFA has realigned GSE pricing with the 2020 capital rule by adjusting the risk-based LLPAs rather than the base guarantee fee. LLPAs are set to cover expected losses based on credit score, LTV and other factors, plus generate a profit margin. Prior changes included raising the profit margins on “mission-remote” loans (cash out refinances, investment properties, vacation homes, and loans above $726,200 in the continental US), and lowering margins on the “mission” loans, such as those to lower-income first-time homebuyers and other underserved segments. The May 1 changes apply to the core business only: purchases and refinances for all other owner-occupants, the bulk of GSE business.

High LTV GSE borrowers also carry private mortgage insurance, which lowers losses to the GSEs. PMI costs increase steeply with credit scores, reflecting the reality that PMI companies too must hold more capital against loans with lower credit scores. Thus, lower credit score loans are being heavily capitalized for by both the GSEs and the PMIs. The new LLPAs better capture the relief that PMI and its capital provide the GSEs.

Interestingly, FHA lowered annual pricing in March 2023 [see p 33]. As a result, the inflection point where credit score and LTV combination make a GSE loans a better execution than an FHA loan has fluctuated this year. Page 33 shows that the tradeoff point for today’s borrowers with less than 5% who meet the GSE’s affordable housing goals is 740 credit score and above. However, these borrowers were not affected by the May 1 LLPA changes.

For loans affected by the May 1 LLPA changes, none of the borrowers with LTVs above 95% had a better execution with GSE loans than with FHA before, but after the changes, those with credit score of 780+ could go either way. We estimate that core borrowers with LTVs of 95% have a better execution with a conventional GSE loans if their credit score is around 760 or higher , as was the case before May 1.

In closing, it’s worth noting that the recent changes to LLPAs and FHA premiums reflect risk fundamentals, and do not compromise the risk quality of their loans. As our Housing Credit Availability Index (HCAI, p 13) and loan performance charts (p29) credit quality remains high in both channels.
 

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• April 29th Chartbook Call featuring Dave Stevens; Chartbook Slides
• January 28th Chartbook Call featuring Ed Golding; Chartbook Slides
• October 29th chartbook call featuring speaker Ed Golding.
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• July 2019 (watch the July 29 chartbook call with guest Richard Green)
• April 2019 (watch the April 29 chartbook call with guest Dave Stevens)
• January 2019 (watch the January 30 chartbook call with guest Dave Stevens)

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