Greg Richardson: The Non-Agent Mortgage Market Is Ready For A Comeback

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CHARACTER OF THE WEEK: The COVID-19 crisis stalled the non-agent mortgage market in 2020, but there has been an increase in non-agent securitization of home mortgages in recent months.

To find out more about what awaits the non-agent market in the second half of 2021, MortgageOrb recently interviewed Greg Richardson, the company’s Atlanta-based commercial director. MAXEX, a digital exchange for buying and selling mortgages through a single clearing house.

Q: The non-agent market was almost completely destroyed by COVID a year ago and is now thriving as more investors and developers expand their giant offerings. What were some of the important ingredients in the return of the non-agent marketplace?

Richardson: The summer of 2020 brought historically low interest rates thanks in large part to the backing of the Federal Reserve, which has become the largest buyer of Mortgage-Backed Agency Securities (MBS). Historically low mortgage rates have fueled a flurry of refinancing activities that have pushed cash back to bond investors at a record pace.

These investors needed to reinvest this money in various asset classes, including the MBS agency. As the 10-year Treasury yields traded below 0.50% and the agency MBS spread narrowed to unprecedented levels, bond investors began looking for alternative assets with higher yields, including non-agency MBS. The move also pushed giant mortgage rates to historically low levels, spurring giant lending volumes and giving bond investors a plethora of non-agent MBS deals in which they could reinvest their cash.

In our company, we have seen a wide variety of buyers, including Wall Street broker-dealers, insurance companies, banks and real estate investment funds (REITs), who have bought giant loans at competitive prices and with attractive returns, both for investment and for other purposes. securitization.

Q: The last two years have been incredibly fruitful for the mortgage industry, with annual loan volumes reaching $ 3.8 trillion despite the pandemic. With lending volumes shrinking as interest rates and house prices rise, what should originators and investors do now to prepare?

Richardson: Before COVID, lenders were issuing about $ 2 trillion in new mortgages a year. According to the Mortgage Bankers Association (MBA), when rates fell sharply in the second half of 2020, demand skyrocketed and originators increased their capacity to close more than $ 3.8 trillion.

The MBA currently predicts that the number of mortgages will decline to $ 3.4 trillion in 2021 and $ 2.3 trillion in 2022, with rates expected to continue to rise.

Originators need to be flexible as we move to lower volumes and higher rates over the next 12-18 months. The focus should be on adapting capacity needs by leveraging technology, retaining senior staff, and providing borrowers with a broader product base by maximizing liquidity with a variety of investors in the secondary market.

As rates rise, the business of buying money will become more important as consumers will continue to need new homes and will be less sensitive to interest rates. Historically, regardless of whether rates go up or down, consumers want to move and buy homes for a variety of reasons.

Q: Recent regulations from the Federal Housing Finance Administration (FHFA) and the CFPB have markedly changed the number of funding initiators now and will eventually do business with the GSE, in particular the order for a loan for rent and non-owner-owned secondary housing See also the new QM Rule. How big a role will the non-agent market play in providing home loans in relation to these decisions?

Richardson: Right now, you see this balance of reduced production, more regulation and more restrictions from FHFA, Fannie and Freddie’s main regulator. The $ 1.5 billion cap on GSE cash sales will have a strong impact on those lenders who generate more than $ 3 billion a year.

Originators will need to work with agencies to migrate to MBS from cash if they want to maximize their liquidity options. This is not an easy task as agencies will look to these creators to implement policies and procedures, develop the MBS delivery methodology, internal staff and technology.

In this regard, the FHFA also limited the number of second homes and investment properties to 7% of total sales. Many sellers create over 7% of these types of loans and they struggle to find other sources of liquidity for these loans. MAXEX has several active buyers involved in this space and we have sold several hundred million of these loans.

Some developers are already moving towards adopting a revised quality management rule by the October 2022 deadline. This new pricing approach requires that the annual percentage rate (APR) on the loan does not exceed the average basic offer rate (APOR) for the comparable transaction. For loans that qualify as Safe Harbor, the annual interest rate cannot exceed the APOR for a comparable transaction by more than 1.5 percentage points. A significant number of large mortgages that were previously considered non-QM transactions will become eligible for QM under this new APOR rule. Thus, it will change significantly and transfer some of the burden, which was significant, to the non-agent market.

Q: In 2021, there was the largest issue of large large securitizations since the financial crisis. JP Morgan is a leader, but many other Wall Street firms are active, including Morgan Stanley, Goldman Sachs, Citigroup and Bank of America. What factors are driving these types of firms to conduct more and more large securitizations?

Richardson: With the onset of COVID, the Federal Reserve stepped in and began buying billions of dollars in mortgage-backed agency bonds to support the housing industry. This led to lower rates, a sharp increase in refinancing, and investors suddenly had cash due to prepayments and looking for places to reinvest that money.

Many of these investors wanted more profitability and a continued presence in the mortgage market, and began to look at non-agency securities backed by large residential mortgages (RMBS). As RMBS spreads narrowed due to increased demand, this led to a giant drop in rates and an increase in outbound documents. Wall Street dealers have the ability to take out these loans and create various bonds, dividing the cash flows to meet the varied “real” demands of investors.

Q: You have been in the mortgage business for over three decades. When it comes to innovating, the system is notoriously slow. Which of the most important advances in technology do you think will make the industry more efficient and transparent?

Richardson: Fintech originators are overly focused on digitizing mortgage lending early in the business with direct consumer impact, creating internal efficiencies that drive down the cost of credit. While this is incredibly important, not many companies really target the aftermarket.

Our company, with its broad base of buyers on the exchange, is also focused on integrating many processes and data to bring change and innovation to the aftermarket. It’s really all about the speed of capital and the provision of many different sources of efficiency to keep costs down. This is especially important as rates rise so that originators can remain competitive, maximize margins, and provide the consumer with the best rates.

Q: On a more personal level, if you could go back and talk to yourself ten years ago, what advice would you give?

Richardson: I would advise myself to take more time for myself and read more! When you live in the moment, there just isn’t enough time to do all of this. I have hundreds of books and have only read half of them. Take time each day to immerse yourself in a book, learn more, and sometimes just relax!

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