Preparing for what’s next as COVID mortgage boom subsides



A year after the peak in secondary mortgage spreads of about four percent in the summer of 2020, there is evidence that the home mortgage market is cooling, especially for more expensive homes. From Westchester County, New York, to the Rocky Mountains, COVID-driven travel across recreational facilities located far from major cities appears to have exhausted itself.

One well-trained mortgage executive reports that once sleepy White Fish, Montana, there are many out-of-state numbers, a city full of new arrivals, and applications for seven-digit homes that have passed out in the past 90 days. … A similar phenomenon insuburb of new york also ran out of steam, suggesting that the first part of the COVID trade in expensive escape homes is over.

Even though in the bond market, the yield on 10-year Treasuries fell below 1.3%, consumers don’t seem to respondassuming that in the world of mortgage finance as well as in related fields such as building and home improvement.

“The sluggish response of American homeowners to loan rates about 3% mortgage bond investors are asking if the refinancing wave is over, ”writes Chris Maloney in Bloomberg News… “The decline in Treasury yields is not a signal that the economy is preparing for sustained growth.”

Maloney notes that staff growth in mortgage lending in 2020 was much less than in 2008, no doubt due to the significant productivity gains seen in the industry. But this increase in productivity will only mean fiercer competition for falling loan volumes throughout the year.

Some lenders, of course, are continuing to add staff to OS and operations specialists in preparation for what one industry veteran called “the final battle.” United Wholesale Mortgage, for example, pursued a scorched earth strategy, matching secondary market prices with any credit in the wholesale channel.

This beggar-thy-neighbor behavior makes mortgage bankers very bearish about future profitability. For example, Fannie Mae’s survey of mortgage lender sentiment for the first quarter of 2021 showed that more than half of respondents expect revenue and profits to decline by the end of the year.

“More than two-thirds of respondents, 69%, said their profits would decline over the next three months, while only 11% expected them to increase, with a negative net difference of 58%,” it said. Brad Finkelstein from NMN

“Net equity measures the difference between percentages who think they will be higher and those who think they will be lower. Thus, for three quarters in a row, lenders were pessimistic about their profitability. “

Even as volumes decline, some large lenders continue to build capacity. Citigroup, for example, continues to add job positions across the country, including senior underwriter and sales positions. The monetary center bank largely abandoned home mortgages half a decade ago, but now appears to be returning to the home loan market.

A more complex operating environment for lenders means that cost management is back in vogue, including leaving money on the table. For example, when considering the eligibility for servicing mortgages, issuers are increasingly focusing on monetizing MSRs rather than giving them away.

“Last year, the spreads were so wide that we were actually paying people to get MSR,” says one veteran issuer. “Now this behavior seems absurd with the maintenance of assets that are trading at a flow in excess of five times the cash flow.” The issuer says the hot trade right now is buying government MSRs to refinance from FHA loans to conventional loans.

The volume of mortgage purchases continues to be high, notes Ed Pinto of the American Enterprise InstituteWeek 26 is 36% more than the same week in 2019 and about the same level as in 2020. While refinancing is on the decline, the mortgage market remains strong and poised for another good year, albeit with sharply lower margins.

As the housing complex shows signs of slowing down and cost management is again a priority for rational market participants, the Federal Open Market Committee is changing its position to an earlier one. reduced purchases of mortgage-backed securities and even TBA… The Fed has distorted the mortgage market with “quantitative easing” by slashing multi-year mortgage loans and home sales and related consumer spending in just a few months in 2020.

One senior industry regulator expressed concern that Independent Mortgage Banks (IMBs) could bail out 3-4 points from mortgage sales last year. The fact is that the Federal Open Markets Committee made this profit increase inevitable, but now a period of weaker volumes and narrowing spreads follows. And a cutback in MBS purchases from the Fed could lead to a significant increase in mortgage rates.

IMBs that were smart enough to cap profits and maintain MSR when cash flows were plentiful over the past year can now afford the luxury of selling these increasingly valuable assets or enjoying cash flow. Firms that have not retained service must now survive on cash and investment as aftermarket execution eludes losses.

Also of concern is the migration of risk from the FHA market to the traditional Fannie Mae and Freddie Mac market as a result of the rise in FOMC house prices due to low interest rates. For example, the flow of refinancing volumes from government loans to traditional assets could push Ginnie Mae MBS volumes towards a net outflow in 2021.

Changes by Former Director of the Federal Housing Finance Agency Mark Calabria to the GSE checkout windows, for example, these GSE volumes have been reduced, but simply producing vanilla made the difference. Small IMBs were forced to rediscover the joy of releasing their own MBS.

Changes to the checkout window contained in the last Preferred Shares Purchase Agreement between the GSE and the Treasury significantly affected the profitability of some mortgage issuers. Don’t expect these changes, which have allowed some aggressive issuers to access lower guarantee fees and avoid valuations, to change anytime soon.

Ironically, the acting director of FHFA Sandra Thompson, author of draconian capital rules for the GSE, may soon be under pressure to make a change to counter the slowdown in the housing sector. Many of the reforms of the Calabrian era were the result of government rulemaking, so don’t expect quick changes in PSPA or capital rules.

One possible area for change on Thompson’s part is loan-level pricing adjustments made more than a decade ago, pricing rules that were introduced to prevent consumer refinancing and thus protect the GSE after 2008. Any such changes would also hurt profitability and risk. GSE profiles showing that tight spreads and falling volumes are a problem for all residents of the housing finance complex.


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