“U.S. home prices continued to rally in July 2023,” Craig Lazzara, managing director at S&P DJI, said. “Our National Composite rose by 0.6% in July, and now stands 1.0% above its year-ago level. Our 10- and 20-City Composites each also rose in July 2023, and likewise stand slightly above their July 2022 levels.”
“Although the market’s gains could be truncated by increases in mortgage rates or by general economic weakness, the breadth and strength of this month’s report are consistent with an optimistic view of future results,” Lazzara added.
In July, prices rose in all 20 cities after seasonal adjustment, and in 19 of them before adjustment.
Chicago (+4.4%), Cleveland (+4.0%) and New York (+3.8%) posted the largest price gains on a year-over-year basis, repeating the ranking we saw in May and June.
At the other end of the scale, the worst performers were Las Vegas (-7.2%) and Phoenix (-6.6%).
The Midwest (+3.2%) continued as the nation’s strongest region, followed by the Northeast (+2.3%). The West (-3.8%) and Southwest (-3.6%) remained the weakest regions.
“The Case Shiller index indicates that the typical home price in July 2023 is about 45% higher than it was four years ago in July 2019,” said Bright MLS Chief Economist Lisa Sturtevant. “This is about the same rate of price growth that occurred during the 2002 through 2006 period when subprime lending drove exuberant housing demand.
“But that is where the similarities end. Today’s housing market is very different from the one that led up to the 2008 financial crisis and ultimately a 20 to 40% home price correction. Inventory is still very low by historic standards and buyers who are able to handle higher mortgage rates are still finding the market very competitive. Mortgage holders are well-qualified and subprime loans are rare. Housing equity is at an all-time high, providing homeowners a very deep cushion against a downturn. Demand is strong, driven by the large millennial population that is in prime first-time homebuying age.”
Indeed, rents dipped for a fourth month compared to a year ago, Hale said. However, the cumulative drop in rents remains relatively modest nationwide, only down 2% from the peak. Furthermore, regional trends vary, with some markets still seeing relatively robust rental growth. Meanwhile, a record-high number of multi-family units are on the way, which will provide some relief over the next several months, even as multi-family starts slow, Hale concluded.
Source: housingwire.com
This article originally appeared on The Financially Independent Millennial and was republished here with permission.
If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire. From Seattle, WA, to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high millennial demand for housing. The market hasn’t seen this much activity ever (even more so than the housing financial crisis of 2008).
Given the recent interest in home buying, we thought it would be prudent to discuss exactly how Americans can afford such large homes. And, why now? After all these years, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what its advantages are. They’re equally complex and beneficial, so it’s important to ensure we cover all the bases.
Simply put, your home secures the mortgage loan. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.
The lender gives the borrower cash, and charges them interest on it. Borrowers then pay back the loan in monthly installments that are convenient for them. Your property acts as security against the mortgage. And, your lender retains a charge until the borrower pays the loan in full. As a result, the lender will have a legal claim to the property for the duration of the loan. If the buyer fails to pay the debt, the lender has the power to seize the property and sell it at auction.
No matter what anyone tells you, always remember: A mortgage is a debt. Debt is a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is good. Many today would argue that mortgage debt is good since the rate is so low and it affords you a bigger home.
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Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means of increasing fortune. What’s awful about debt, factually, is reckless credit usage.
Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.
The interest rate is fixed for the duration of the loan. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon.
Pro: It’s predictable because the monthly payment is fixed.
Con: Taking out a fixed-rate loan while the interest rates are high means you’re stuck with it for the duration of the loan. The only way out is to refinance at a lower rate.
After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. Lenders sometimes publish ARMs with a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.
Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate. But, it might wind up costing more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.
Con: Future rate hikes might be significant, leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they chose a fixed-rate mortgage.
Sometimes, a homeowner already has a mortgage but wants to change the terms. Maybe they want a lower rate or a longer term. Or maybe, they want to take out more equity from their home. Whatever the case, many options are available! The most common would be refinancing the home mortgage. With mortgage refinance, the homeowner closes out their original mortgage, and obtains another one – ideally with more favorable terms.
With interest rates so low these past couple of years, refinancing has become much more popular. How often a homeowner refinances is usually a personal decision, but they should consider at least these factors:
Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t significant, then it could definitely be worth refinancing. On the other hand, if you need the money for home renovations, a cash-out refinance may be your best bet.
Cons: Refinancing costs money, so make sure the math works in your favor.
The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit history and debt-to-income ratios.
Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they have less than 20% for the down payment.
Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.
The average age of home purchases has decreased, and an increasing number of millennials are now purchasing their first houses. Typically, the loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest negotiated on the mortgage. For homebuyers, a longer contract means a lower payment, but a longer time to pay off that debt.
Some lenders may offer an interest-only mortgage, meaning the borrower’s monthly fees will cover only the interest. As a result, it’s best to have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the end of the period.
Interest-only loans may be appealing since your monthly payments are low. But, unless you have a strong strategy to reimburse the capital, at some point, a fixed loan could be the better option.
Pro: Interest-only mortgages allow the borrower to place their capital elsewhere, such as in dividend stocks, a rental property, or other investments.
Con: Borrowers who aren’t careful with their budget may find themselves never being able to pay off the loan.
Read more: 15 Ways to Generate Passive Income from Real Estate
FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs.
The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued by participating lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.
Pro: FHA loans need a smaller down payment and credit score requirements are lower than conventional loans. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.
Con: Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.
Read more: How to Improve Your Credit Score
An FHA 203(k) loan is a government-insured mortgage allowing funding borrowers with one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.
Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5% down payment.
Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. The rate may be greater than on a normal FHA loan. You’ll also have to pay both a one-time, and monthly mortgage premium insurance payments.
Home loans for veterans, reservists, and military or National Guard members, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs.
In fact, nearly 90% of all VA-backed home loans are made without a down payment.
Pro: You won’t have to put any money down, or deal with PMI payments every month.
Con: On purchase loans, a one-time VA “funding charge” varies from 1.4% to 3.6%.
The Fannie Mae homestyle mortgage needs just 3%–5% down, but a credit score of 620 is an option for fixer-uppers.
Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan.
Con: Credit score requirements must be met.
Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects for the lender to consider.
Pro: There are no monthly payments required, and the homeowner can select between a one-time balloon payout, a monthly payout, a line of credit, or a combination of the three.
Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third-party expenses are usually paid by the homeowner.
Mortgage loans are given to those who have enough income and assets vs. their debt. Mortgages also aid in the development of credit. They enable homeowners to invest in a home, with the advantage of having a forced-savings component. However, like with any loan, borrowers should be responsible when taking out a mortgage. It’s easy to get carried away and buy more than is necessary (and become house-poor).
Source: credit.com
The Supreme Court is taking on a case that questions the constitutionality of how the Consumer Financial Protection Bureau (CFPB) is funded. Oral arguments are set for Oct. 3.
The CFPB is a consumer watchdog agency funded by the Federal Reserve System, not Congress. This funding mechanism was established by a Democrat-led Congress and is meant to safeguard the agency’s funding against changes in the political climate.
The case against the CFPB was brought by the Community Financial Services Association of America and the Consumer Service Alliance of Texas, which both represent the payday loan industry. The suit alleges that the CFPB’s funding mechanism is unconstitutional under the Appropriations Clause of the Constitution. That clause says “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.”
Last year, the U.S. Court of Appeals Fifth Circuit in New Orleans took on the case and in October 2022, the judges in that panel unanimously ruled against the CFPB.
If the Supreme Court upholds the Fifth Circuit’s ruling it could bring into question all previous enforcement actions the agency has taken since its inception. Such a decision could also stymie the agency’s ability to carry out its mission in the future.
The CFPB was formed in the wake of the 2008 financial crisis, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Its mission is to implement and enforce federal consumer financial law. It does so by holding accountable the companies that market these types of products such as payday loans, credit cards, student loans and mortgages. It additionally collects consumer complaints.
The CFPB can also take legal action against companies. From 2012 to 2022, the agency has filed 322 public enforcement actions, resulting in more than $16 billion in relief to consumers and $3.7 billion in fines.
In fiscal year 2023, the CFPB has $3.57 billion in budgetary resources, which represents roughly 0.006% of the $6.4 trillion fiscal year 2023 U.S. federal budget. But the agency planned to spend much less — about $723.3 million, which represents about 20% of its overall resources.
The question of the CFPB’s funding wasn’t the primary focus of the original lawsuit — its 2017 payday lending rule was. That rule prevents short-term lenders from lending to consumers without reasonably determining if they can repay the debt. It also prevents lenders from withdrawing payments directly from consumers’ bank accounts when payments have been missed without permission of the consumer.
The suit originated in April 2018, was eventually struck down and then appealed in the Fifth Circuit Court. There, the panel of judges didn’t side with the two plaintiffs on their claims against the 2017 payday lending rule, but they did agree with the plaintiffs’ claim against the CFPB’s funding mechanism.
In the Fifth Circuit Court’s decision, it said the “Bureau’s unique, double-insulated funding mechanism” violated the constitution’s separation of powers.
Soon after the Fifth Circuit Court’s decision was handed down, the Biden Administration appealed to the Supreme Court. On Feb. 27, the Court agreed to hear the case in its 2023-2024 session.
The Supreme Court will hear oral arguments on Oct. 3 for Consumer Financial Protection Bureau v. Community Financial Services Association of America. However, a decision is not expected until late spring 2024.
Source: nerdwallet.com
However, a silver lining in the subdued housing market is the strength in new-home sales. Builders are providing rate buy-downs for first-time homebuyers, which aligns with their interests, Duncan explained.
Read on to learn more about Duncan’s views on the housing market, loan performance and affordability challenges homebuyers face.
This interview was condensed and lightly edited for clarity.
Connie Kim: The Federal Reserve decided to keep the benchmark rate unchanged in the target range of 5.25%-5.5%. With the majority of Fed officials expecting another rate hike before the end of 2023, how do you think this decision will affect housing and your forecast for the economy?
Doug Duncan: It’s our forecast that they won’t make another change until they drop rates. I think the forwards suggest that in either November or December, there’s a 50/50 chance to make an increase. I would say the risks are tilted that way, but we don’t have it in our forecast model.
We don’t have (the Fed) dropping rates until the end of Q2 next year, and we have a mild recession that starts in that quarter.
The reason that forwards are suggesting a 50/50 chance of another increase is that growth has been stronger than anticipated. We actually think that’s going to slow; I think that this is kind of like a final burst of activity.
We don’t know what third-quarter growth was. Our expectation, at an annual rate, is it’s north of 3%. If there’s another quarter like that, and oil prices have pushed to $100, then I think you get another quarter-point move by the Fed, especially if you don’t see a substantive change in employment.
Kim: Spreads in the mortgage space are wide. What are the reasons for that?
Duncan: There are several reasons for that. If that business flow for a time period helps them cover the variable costs, then it can be effective.
For one thing, no fixed-income investor thinks that mortgage-backed securities with 7% mortgage rates will be there when the Fed finishes the inflation fight. They’re going to cut rates and that will prepay. So you’re having to encourage investors with wider spreads to accept that.
It’s also the case that the Fed is running its portfolio off because they don’t talk about it much. But somebody has to replace the Fed, and the Fed is not an economic buyer. That is they weren’t buying for risk-return metrics; they were buying to affect the structure of markets. So they are a policy buyer.
They were withdrawing volatility from the market, and they were lowering rates to benefit consumers. When [the Fed] is replaced, it’s likely to be by a private investor who’s going to have yield expectations. They may require wider spreads than the Fed because the Fed is not an economic buyer.
Kim: A bit of good news for lenders in Q2 was that their production volume went up and origination costs went down. Are you optimistic this trend will continue?
Duncan: If rates stay at the 7.25% level, it’s going to be worse, not better. On the production side, the mortgage business is in recession because the levels of existing-home sales are back where they were at the end of the great financial crisis at around 4 million units. That’s very low historically.
I don’t see how it can go much lower than that. Even if we have a recession, we don’t see it going just a hair under 4 million. The reason why some of the headlines look good about housing is because house prices were expected to fall when rates ran up. They did for a quarter as households sort of adjusted to the idea that they were going to be running at a new higher level.
But prices are rising again. For existing homeowners, that’s good news because it means equity accumulation. But if you’re a first-time buyer, that’s not good news because it means it’s harder to qualify — especially with interest rates where they are.
Production is in a recession. The servicing side of the business is doing very well because those loans are simply not going to prepay for a long time. So, the servicing valuation on those loans is strong, because pre-payments are low. It’s a bifurcated market in that sense. We expect production volumes to remain low through 2024 and start to pick up maybe toward the end of 2024.
Kim: The silver lining in the current housing market is an uptick in new construction sales due to a lack of existing-home inventory. To what extent builders will offer rate buy-downs to drive sales remains to be seen. How likely are builders to support rate buy-downs, especially when it’s becoming expensive to do so?
Duncan: The traditional way in which builders gave borrowers choices regarding affordability was to offer them granite countertops. So if sales volume slows, they will throw in granite countertops, finish the basement or finish out the garage.
In doing interest rate buy-downs, they’re focused more on the problem of the first-time buyer. That’s because [the cosmetic] attributes of a house are more for move-up buyers. Builders recognize they’ve got to do something for affordability for the first-time buyer.
The share of new-home sales that are going to first-time buyers is the highest it’s ever been. The share of total sales that are new-home sales is also the highest it’s ever been. This is a highly unusual structure for the market.
The builders know that those loans are likely to get refinanced, even if they buy down two points. So they go from 7.5% to 5.5%. When the Fed is done with the inflation fight and if economic growth is back to the 2% to 2.5% level, mortgage rates will probably run to 4.5% to 6% over the cycle. These loans are going to refinance, and the consumer will be in good shape, building equity to become a move-up buyer. So there is an alignment of interests for the builders in doing this.
Kim: The housing market was relatively active during the spring and summer homebuying seasons despite lower historical sales than previous years. Looking ahead, do you see another rough Q4 like last year when rates surged? What are some factors that Fannie Mae is monitoring?
Duncan: If growth surprises to the upside, that will get the Fed to increase interest rates, which will push [mortgage] rates again. That would be the biggest challenge and just seasonality; the fourth and first quarters are the low points for seasonality.
Kim: Bankruptcies and layoffs are still happening. How far are we into the industry’s consolidation?
Duncan: I was looking at the bankruptcy data. It’s just gotten back to the pace of bankruptcy we saw in 2019. It is true [consumer] bankruptcies have been rising but from extremely low levels. I actually expect that to continue. In part, that’s because some businesses (probably smaller and midsized businesses) were kept going by very low interest rates for a very long time.
In the mortgage space? Certainly, you’ll continue to see exits from the business. Typically, mortgage companies are not publicly owned. So it happens quietly. It’s people in the industry that know who the players are that are in trouble. The employment data comes out on a lag basis for brokers and loan officers. So that has picked up. I would expect more.
Kim: Executives at Dark Matter Technologies noted that lenders are most interested in bringing down their origination costs and retaining their clients in this rising-rate environment. What other demands do you see from lenders?
Duncan: They have been investing in technology — primarily consumer-facing technologies to get business in the door. Now, that’s not a possibility. Because of the changes in interest rates and a drop-off in demand, they are now focused on tech investments that go into cost savings.
They are turning their attention to what they can do to lower origination costs. Can they convert fixed costs to variable costs? That’s really the question that the industry has to focus on. If they can convert fixed costs to variable costs, then when the cycle changes, they don’t get hit as hard by the drop-off in this business. That’s because the operating structure also drops off.
Kim: I notice a lot of independent mortgage banks roll out down payment assistance (DPA) programs for conventional loans. DPA programs were predominantly for FHA loans. What are the pros and cons of IMBs rolling out DPA programs for conventional loans?
Duncan: For the independent mortgage companies, down payment assistance gets the business through the door, right? If they’re covering their variable costs, they can keep going for a while and, eventually, they have to cover the fixed costs.
The question is, what are the other credit characteristics of the borrower? If they are an IMB, they have to place it with an investor. So the investor will be monitoring. For example, if it’s Fannie Mae or Freddie Mac, we monitor that. We look at making sure there are not layered risks in any consumer’s profile. For example, if they have a spotty employment record, but they’ve always paid their bills on time, and they have savings, they’ve got money to pay 20% down, then it would probably be acceptable to have that spotty employment record. But if there’s a spotty employment record and a spotty repayment record on their credit, that’s not going to make it through the screen.
Kim: DPA programs offered with FHA loans come with higher rates. If the FHA loans layered with a DPA are more costly, how do first-time buyers benefit from these programs?
Duncan: The question you ask is a really interesting social question. The foreclosure rate for FHA loans is higher than the foreclosure rate for VA loans or Fannie Mae or Freddie Mac loans. Fannie and Freddie are the lowest; VA is a little bit higher. FHA is the highest. There’s not a clear answer on what’s the optimal rate of foreclosure.
If [that rate] is zero, we can get to zero. But we aren’t going to be making very many loans. So there is some optimal level of risk-taking to help people realize their hope of owning a home. But it’s not a hard and fast number. Different people have different points of view on that.
Source: housingwire.com
BEIJING, Aug 29 (Reuters) – Some Chinese state-owned banks will soon lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, as Beijing ramps up efforts to revive the debt crisis-hit property sector and bolster a sputtering economy.
The quantum of the cut on existing mortgages, which, if implemented, will be the first such move in China since the global financial crisis, would be different for different types of clients and in different cities, said the sources.
The reduction could be as much as 20 basis points in some cases, said the sources, who declined to be named as they were not authorized to speak to the media.
The country’s central bank, the People’s Bank of China (PBOC), did not immediately respond to Reuters’ request for comment after business hours.
The reduction in existing mortgage rates will come amid several other property, economic and market support measures Beijing has announced over the past few weeks, as concerns mount about the health of the world’s second-largest economy.
The property sector, which accounts for roughly a quarter of the economy, has lurched from one crisis to another since 2021, and contagion fears deepened this month after liquidity stress in leading developer Country Garden (2007.HK) became public.
Chinese lenders were widely expected to cut interest rates on existing mortgages after the PBOC earlier this month said that it would guide commercial banks to do so.
The central bank’s proposal to cut rates, which came after a wave of early repayments of mortgage debt, aims to reduce the interest rate costs for homebuyers and to boost consumption in a slowing economy.
China has been cutting new mortgage rates since last year to boost sales in its moribund property market, but the main result so far has simply been a rush by households paying off existing mortgages early, squeezing banks’ profits.
Lowering existing mortgage rates is expected to further weigh on the banking sector’s net interest margin (NIM) – a key gauge of profitability – which fell to a record low at the end of the second quarter, official data showed.
Chinese banks have been battling headwinds such as lower lending rates and pressure from the government to prop up the economy, as well as bad debt related to property developers and local government financing vehicles (LGFV).
China’s mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks’ total loan books.
Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11%, while the average rate on all existing mortgages is at least 100 basis points higher.
Citigroup in a note this month said that the repricing of existing high-yielding mortgages would further add to Chinese banks’ NIM pressure and dampen their profitability and lending capability.
Adjusting existing mortgage rates is conducive to easing pressure on banks from mortgage prepayment, Lin Li, vice president of Agricultural Bank of China Ltd (601288.SS), the country’s No.3 lender by assets, said earlier on Tuesday.
The bank would draft detailed implementation rules on rate cuts after policies on this become clear, he said. The lender reported a drop in its NIM to 1.66% at the end of June from 1.7% at the end of March.
Chinese banks’ net interest margin would face downward risks in the second half of this year, Fu Wanjun, Agricultural Bank of China’s president, said.
To soften the hit on the margins, the three sources said that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points.
Cutting deposit rates could help banks to maintain a proper level of NIM, one of the sources said.
Analysts have said China last week did not opt for a broad rate cut that would further depress banks’ narrow net interest margins, instead deferring to banks to cut their deposit rates and give themselves room to cheapen mortgages.
($1 = 7.2916 Chinese yuan renminbi)
Reporting by Xiangming Hou, Rong Ma, Ziyi Tang and Ryan Woo in Beijing, Selena Li in Hong Kong; Editing by Sumeet Chatterjee, Alex Richardson and Sharon Singleton
Our Standards: The Thomson Reuters Trust Principles.
Source: reuters.com
For example, bank regulators in July released a plan to increase capital requirements for residential mortgages, the Basel III Endgame rules. Redwood executives are positioning the company to acquire mortgage loans in the market, mainly jumbos, with the expectation that banks will have a reduced appetite.
Abate doesn’t think “banks are going to necessarily exit the mortgage market,” but they will “be heavily disincentivized from growing mortgage portfolios.” Ultimately, “the real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.”
Another opportunity is in the home equity space. Redwood launched in September its in-house home equity investment (HEI) origination platform called Aspire. Through Aspire, Redwood plans to directly originate HEIs by leveraging the company’s nationwide correspondent network of loan officers and establishing direct-to-consumer origination channels, the company said.
“The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI,” Abate said. “The way the investor gets paid is that you share in the upside of the home.”
Abate explained the impacts of the Basel III Endgame rules on the market, the rationale behind the home equity investment product, and more about Redwood strategies in an interview with HousingWire from a company’s office in New York last week.
This interview has been condensed and edited for clarity.
Flávia Nunes: How has Redwood strategically positioned itself in the residential mortgage space amid all of these potential regulatory changes?
Christopher Abate: Redwood is almost a 30-year-old company. The company was originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets], only Fannie Mae and Freddie Mac. We would partner with banks to buy their loans and securitize them so the banks could recycle their capital. We don’t originate residential mortgages. We don’t service them. We’re very similar to the GSEs. We modeled the business to serve that role in the private sector. The mortgage market has changed over the decades. We’ve seen a few cycles. We’ve got the Great Financial Crisis, the Covid-19 pandemic, and now we’ve had a lot of interest rate volatility. Along the way, there have been many regulatory changes that have impacted the market; the CFPB has been created, and there’s the Dodd-Frank Act. Then there are the Basel rules, the regulatory capital rules for banks. And that’s what’s really in play today.
We’ve positioned the company, from a strategic perspective, with the thought that banks will be heavily disincentivized from growing mortgage portfolios as an earning asset class. The banks are not going to necessarily exit the mortgage market because the mortgage asset is the biggest that a client takes out, and you want to be there for all the cross-selling in all the other consumer products. Banks will always serve their best clients. But viewing the mortgage portfolio as an investment class, that’s where the posture will shift because the capital required to hold against it [residential mortgages] is going to go up. And just based on the rapidly rising rate of deposits, just given where interest rates are at, the net interest income that they earn is getting squeezed. Banks move slowly. This will be an evolutionary shift, not an overnight shift.
Nunes: As you noted, bank regulators released a plan to increase capital requirements for mortgages through the Basel III Endgame rules. Can we expect changes to what was proposed?
Abate: Yes, it will change. In particular, some of the sliding scale capital charges are based on things like LTV [loan-to-value]; there’s a fair likelihood that that changes because of the way it disproportionately impacts first-time homebuyers and underserved communities. But the rule is not going away. Bank regulators are paid to keep things safe. And the idea that regulators are going to allow banks to continue to do what a First Republic or Silicon Valley Bank did, I don’t see that in the cards.
We saw significant changes after the Great Financial Crisis, which was more of a credit crisis. We saw banks getting out of risky credit mortgages like option ARMs and some subprime lending happening back then. There will be changes. Banks will not wait for the rule to be finalized to start implementing it. There will be some evolution to the rule itself. But the thrust of the rule is that it’s going to be more expensive for banks to hold mortgages.
Nunes: If banks won’t wait for the Basel III Endgame to be finalized, how are they anticipating the rules?
Abate: A year ago, banks were very happy to hold mortgages, deposit rates were sticky, and the cost of deposits was still very low. Now, all of them are looking for a capital partner, at least an option to have liquidity. The tone has changed dramatically amongst bank executives. Some banks move more slowly than others.
I like to remind people that independent mortgage banks live and die by liquidity. They care about the basis point. Banks don’t operate that close to the ground. Things take longer to develop, but the relationships are also typically stickier. Once you forge a strong partnership with a bank partner, the likelihood of them shopping for that liquidity is much less than an independent mortgage bank that is trying to optimize every dollar.
Nunes: In your recent 2Q 2023 earnings report, you mentioned acquiring three bulk pools of loans from depositories, primarily with seasoned underlying loans at attractive discounts. How is the secondary market now for these trades in terms of volumes and prices?
Abate: I certainly expect RMBS volumes to go up significantly over time. It’s not something that happens overnight. We’ve been active. We just completed a deal in August. I would expect us to continue using securitization.
Right now, we’re in this hybrid phase where loans that are getting securitized are partially seasoned loans, and some of the loans have gone down in value–the lower coupon mortgages. The banks have been slowly selling some of those, and Wall Street dealers have quite a bit in inventory. We’re still seeing a lot of that aged collateral coming out through securitization. Issuers like Redwood have been combining current coupon mortgages. We saw this last year in the private sector securitization market, where we had all of this aged inventory. It was hard to get investors to focus on the collateral because there was so much sitting in inventory that they could price it wherever they wanted to. The pricing now is probably the best it’s been in a year, maybe two years. So, the market is finally starting to cross back into more current coupon on-the-run production, which is what we’re focused on.
We’ve completed well over 100 residential securitizations, close to 140 If we factor CoreVest. There’s been years we’ve done 12-15 securitizations. There’s been years where we’ve done none or one. So, we very much want to get volume going again to the extent we could be in the market with certainly a deal a quarter, but if not two or three, that would feel the base to me.
Nunes: In terms of products, what the current landscape brings in terms of opportunities?
Abate: Right now, the biggest opportunity, ironically, is in the regular prime jumbo market because that was the product banks were most focused on. And they weren’t wrong to focus on it from a credit standpoint because when the banks got through the Great Financial Crisis, all the big regulatory shifts were to get them out of taking risky mortgages on the balance sheet. Then, they started taking less risky mortgages, which are jumbos. The real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.
Nunes: Redwood also launched a home equity platform. What is the strategy here?
Abate: When you look at prime rates in the high single digits and add a credit spread to that, even for the most well-qualified borrowers, you are looking at a 10% to 12% interest rate on a second mortgage. For a well-qualified borrower, 750 FICO or above, and a low-LTV first mortgage, you might be comfortable paying 10% to 12%. But that’s the best-case scenario. For everybody else, unlocking that equity is even more expensive. We’re seeing that for the traditional second mortgage products, there’s way more investor demand than consumer demand.
We’ve rolled out the traditional products and a newer product called home equity investment [HEI] options. The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI. The way the investor gets paid is that you share in the upside of the home, so the home price appreciation. There are a lot of use cases for HEI over traditional products. If you think about somebody with a lot of student debt or lower FICO, they’re going to qualify for a very expensive second mortgage. So, this is a good option. It doesn’t add to their monthly payment obligation. You can do what you want with the cash, just like with a home equity line of credit, but not having the payment. It’s a bridge until the second mortgage is cheaper.
Nunes: To invest in this product, investors must believe home prices will keep rising, right?
Abate: There are a couple of things investors care about. You have to believe in a HPA [home price appreciation] story. But one way we mitigate that is we strike the price of the home at a discount to its current appraised value. So that, even if the home is sold next week, the investor will make money. If you believe that interest rates are nearing the top, as far as the Fed’s rate hike cycle, HPA should start to realign. If rates are going down, HPAs are going up. Investors are starting to get comfortable with this huge move in rates, hopefully, this fall is gonna pause.
Then, ultimately, the investors want to understand if we give you $100,000 with this HEI, when do they get their money back? Because it’s a 30-year product. And that’s where we’ve designed the product, which is unique to Redwood, that creates strong incentives for the homeowner to refi.
Nunes: How did you get the property at a discount?
Abate: The product is for people in their homes that are not moving out. There isn’t an actual transaction on the property. It’s somebody that wants to stay in their home. And if it’s a $1 million home, and we offer you $150,000 HEI, we might strike that HEI at $900,000. Let’s say it’s a $1 million home, and for purposes of coming up with the investor return, we’re going to call it a home at $850,000. Even if they sold the home at a $50,000 loss, the investor would still generate a return, and that’s what gets investor capital into the asset class. But what the homeowner gets is all of the proceeds, the cash and no monthly payments
The investors are institutional investors, well-known institutions, firms, pension funds, and life companies; they’re all just to varying degrees focused on HEI now. And the big reason is that nobody’s been able to tap this massive home equity opportunity. We are going to give it a try.
Nunes: Residential mortgages are just one facet of the business. What are your plans for commercial real estate, which has had a challenging year?
Abate: What we do here in New York is our business-purpose lending platform. We realized a number of years ago that investors are becoming a much bigger participant in the real estate markets. Serving them and providing bridge loans to investors who want to flip homes or provide turned-out financing for investors who want to rent homes, that’s an entire other residential business that we run under the flag of CoreVest. In residential, we’ve more or less stuck to our knitting of non-agency. We’ve had opportunities to enter the agency space in the past and participated in certain instances, but mostly, what we do is non-agency.
Nunes: You mentioned banks, but what are the business opportunities with IMBs?
Abate: We’ve had a great long-term relationship with the IMBs. The IMBs have a big opportunity to pick up some [market] share. Since the Great Financial Crisis, most of our business has been with the IMBs. We have a network of between 150 to 200 [partners], predominantly non-banks that we will buy mortgages from. We expect that to rebalance in the next few years. But the IMBs are also a big opportunity to take clients from the banks.
Nunes: And what are the plans for servicing mortgage rights?
Abate: Servicing will continue to move out of the banks. That’s another big opportunity that we’ll focus on. We don’t plan to operate as a servicer, but we might own servicing rights. What we’ve done typically is when we own servicing rights, we will subservice. We want to hire somebody with a call center. And we’ll pay them a monthly fee. But when you balance out the revenue potential with the servicing asset, with the cost of service, there are still good opportunities. There’s a lot of competition for servicing. For some mortgage REITs, that’s their primary asset class, just not for us.
Nunes: Can you shed some light on your partnership with Oaktree and Riverbend?
Abate: Both of those are related to the business-purpose lender space. Oaktree is a great example of us expanding our capital partnerships into the private credit sector. Redwood is a publicly traded company, and historically, when we needed to raise money, we would do a common stock offering or a public market deal. When rates started going up, things got pretty ugly for the mortgage REIT space and the public markets. We and all other mortgage REITs started trading at discounts. Raising money in that environment hasn’t been overly attractive. So, building partnerships with private credit firms like Oaktree to focus on specific asset classes is a big part of what we want to do. One aspect that’s attractive to us is we can earn asset management fees.
The Oaktree model is something that we want to replicate on the residential side as the jumbo opportunity picks up. We’ve been in discussions with other private credit investors and institutional investors who see the same opportunity as in jumbo and non-QM.
Nunes: With a reported cash and cash equivalents of $357 million as of June 2023, can we anticipate any M&A activities, especially considering the challenges faced by many lenders in the industry?
Abate: M&A activity has picked up in the space and based on our track record, we are a logical call. Part of our strategy is: to be active in M&A, you have to be active. It’s not efficient to call on at eight, seven different firms. You start with the ones that have shown interest in actually transacting. We have seen some opportunities, and nothing I can share in this interview, but it’s safe to say we’ve been active in M&As and we’ll continue to focus on that as part of our growth strategy.
We haven’t been open to it [acquiring a lender]. For many years, we’ve wanted to keep the business sort of regulator-light. The best way to do that is not to directly face consumers with products. We’re comfortable originating to investors, that’s what CoreWest does. But investors are sophisticated business-run ventures and not homeowners who may or may not be sophisticated in the financial markets. We have tended to not originate, but I think where we’re at as a company is from a strategic standpoint, we’d be much more open to it through M&A.
Nunes: What do you expect for the macro landscape in the coming year?
Abate: There’s such a vast shortage of supply of homes in many parts of the country, which is supporting home prices. The Fed consciously inflated home prices, particularly during the COVID years. These high asset values prevented normal credit losses you might see through a cycle. The combination of QE-fueled asset prices with an economy that hasn’t dropped off too much has created a strong housing market.
But credit in residential housing should perform immensely better than many facets of the commercial real estate market. There’s so much vacancy in these central business districts. These buildings are valued based on cash flows– not like a residential home, which is an appraisal. If it’s 50% full, it’s worth half as much. From a credit standpoint, certain facets of the commercial real estate sector will have a rough road ahead.
I’m probably supposed to say this, but I feel better about my sector. The technical supporting housing will continue to be strong. The big challenge with residential today is just transaction activity. If you own a home with a 3% mortgage, you don’t want to sell it. If your home suits your needs, the prospect of doubling your monthly payment to move is very unappealing. The real challenge in residential has been a lot of capacity to make loans, but there’s not much demand. If rates do stabilize, that will change quickly. When the market thought in January that rates were stabilizing, we saw a pickup in loan activity, and then they started going up again; we’ll see what happens this fall.
Nunes: Do you see a crisis on the commercial side of the market? If so, how could it impact the residential side?
Abate: It’s hard to say. The only real obvious driver for a crisis is what could be a permanent impairment of occupancy in these commercial office buildings. The way that can affect our markets is there’s a trickle-down effect. If the buildings aren’t full, the restaurants aren’t full, the delis aren’t full, the subways are not full, and the hotels aren’t full because people aren’t traveling to see people in the office. That could have an effect on the economy in general, which would impact housing indirectly. As far as the economy goes, the airports seem more full than ever, and hotels seem to be doing fine. Overall, [the problem] is probably mostly office. But if it keeps getting worse, it certainly could have downstream effects.
Source: housingwire.com
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If you want something sobering, almost mesmerizing, here’s a short drone video of the flood damage in Libya (at the 15 second mark you can see how it tore through the city). Fortunately not so sobering are some stats out of the United States. The U.S. homeownership rate in 2022 was even higher than before the COVID-19 pandemic at 65.8 percent compared to 64.6 percent in 2019. That rebound was driven largely by those aged 44 and younger. And who says Millennials aren’t buying homes? Homeownership continued to climb from the foreclosure crisis (2004) and Great Recession (2008), when rates dipped as low as 63.4 percent in 2016. Homeownership rates recovered approximately half of the 5.6 percent decrease from 2004 to 2016. In Hawai’i the homeownership rate is 59 percent, I bring up the Aloha State because American Savings Bank, First Hawaiian Bank, and Central Pacific Bank joined Hawaiʻi Community Lending, a Hawaiʻi-based nonprofit community development financial institution, in pledging to provide mortgage forbearances to Maui families impacted by the recent wildfires. (Today’s podcast can be found here and this week’s is sponsored by the Trade-In Mortgage powered by Calque. Homeowners can buy before they sell, make non-contingent offers, and tap their home equity to fund the down payment on their next home. Lenders can help their clients negotiate a lower purchase price, reduce their interest payments, and eliminate PMI. Today’s podcast features Greg Korn and Ben Petit in an interview from the New England Mortgage Bankers Conference.)
Lender and Broker Software, Products, and Services
In an era defined by technological advancements, Dark Matter Technologies LLC emerges as a transformative force in the mortgage origination landscape, marking its evolution from Black Knight Origination Technologies. Under the Perseus Operating Group of Constellation Software Inc., Dark Matter Technologies remains steadfast in its commitment to pioneering innovation. CEO Rich Gagliano aptly sums up the company’s vision: “Dark Matter Technologies is on a mission to revolutionize the mortgage origination business by supporting, growing, and aggressively innovating new and existing products.” With over 1,300 dedicated mortgage technology experts and a portfolio that includes Empower, AIVA, Exchange, and more, Dark Matter Technologies is poised to lead the industry into a new era of unparalleled transformation. Learn more about Dark Matter Technologies and their mission, here.
There is approximately $9T in agency or government MSR outstanding. Billions of dollars are being transacted daily and this volume requires disciplined loan accounting processes to record loans accurately, produce investor reporting, and power business decisions. SBO from SitusAMC is a comprehensive loan accounting and master servicing platform that reconciles daily and monthly servicer cash collections down to the penny, aiding in the discovery of potentially misplaced funds and enhancing the financial integrity of the entire process. Servicers using SBO produce accurate and timely details providing confidence that their investor reporting obligations are being met. Schedule a demo of SBO with SitusAMC’s client-focused experts.
“Did you hear Capacity’s big announcement at TMC Fall? We’ve acquired Denim Social! Together, we’re building a support automation platform that helps you automate support, connect more authentically with your borrowers, and close more loans, faster. Read the press release to learn more! We also gave away a personalized AI Assessment worth $10,000 to help mortgage lenders identify opportunities for improving their business with AI. Plus, our new GSE Search feature pulls accurate, up to date GSE regulations within seconds using generative AI. Want to join the AI in mortgage revolution? Meet the Capacity team today.”
A new era in loan origination has arrived. Mortgage Machine Services, an industry leader in digital origination technology to residential mortgage lenders, announced the launch of its namesake platform Mortgage Machine™, an out-of-the-box, all-in-one LOS designed to accelerate lenders’ operational velocity and support an end-to-end digital origination process. Developed by digital mortgage pioneer and industry veteran Jeff Bode, Mortgage Machine utilizes intelligent automation, configurable business workflows and a cloud-based infrastructure to optimize the entire loan lifecycle and create a seamless lending experience. Key platform features include AI-powered task automation, a scalable cloud-based infrastructure, flexible APIs, pre-configured workflows for retail and TPO channels, integrated document management and POS functionality. Mortgage Machine also offers all-in-one eClosing capabilities, including an eClose room, eNotes, eVault and RON, and utilizes MISMO SMART Doc® data and security standards. Visit here to get started on your digital transformation journey.
Blend Labs continues to be the mortgage industry’s leading technology platform. Core to the platform is Blend’s unique integration with Desktop Underwriter® (DU®) and LPA. These integrations help streamline your approval process for borrowers, with all the conditions lined up for your fulfillment team. Add in intelligent and automated follow-ups and you’ll get to the closing table faster and more efficiently. Putting this information at the loan officer’s fingertips creates a streamlined process and eliminates manual work which equals lower costs, higher pull-through, and increased revenue. See more ways that Blend is committing to innovation and continues to lead the way.
Looking for timely advice on how to capture more loan volume and improve your bottom line in a down market? Now is the time to explore ways to tap into new markets. Expanding your mortgage footprint through new products and channels or by reaching new geographies insulates your business against economic and interest rate volatility by diversifying your sources of volume and revenue. By setting the groundwork to connect with new borrower markets now, you’ll open new revenue possibilities for when the market inevitably recovers, positioning your business to hit the ground running and beat out the competition. Download this informative eBook from mortgage solutions provider Maxwell for actionable advice, including how to create your expansion plan and choose the offerings best suited to the markets you want to pursue. Click here to download Growing Your Mortgage Footprint: How to Launch New Loan Products, Channels & Geographic Expansions.
Broker and Correspondent Products
Build your book with AFR Wholesale® (AFR)! Now, get the chance to listen from and ask questions directly to AFR and Freddie Mac to turn those prospects to active pipeline at the next Why Wait webinar series covering Manufactured Home Financing on Wednesday, September 20th at 1 PM EST. Register here today! Have you and your borrowers looked into Manufactured Housing as an option? With unbeatable affordability, customization options that are very tailored, quick installation and trusted quality, manufactured homes are worth exploring. Especially with a top lending partner in AFR who has been an industry leader for over 25 years. This is a live webinar, and a recording will not be provided so make sure to join and get great insight and have the opportunity to ask questions and listen to scenarios! Visit AFR Wholesale, email [email protected], or dial 1-800-375-6071. AFR Wholesale® – Don’t wait. Register today!
“With Cash-Outs on the decline during this high interest rate environment, it is important to present your borrowers with different cash-out options. That is why Vista Point is announcing a brand new HELOC product coming soon, in addition to our existing Closed-End Second. Our HELOC product is being designed as a complement to our Closed-End Second to provide a full suite of Equity Solutions. Our HELOC will provide a specific solution for borrowers that want the optionality of an interest-only payment, or the ability to draw up and buy down their line during the 5-year draw period with no Appraisals up to $250k. Just like on our Closed-End Second offering, with HELOC loan amounts up to $550K and combined lien amounts up to $2.5M, your borrowers can get the cash they need without sacrificing their advantageous 1st mortgage rate. HELOC will be available for full doc and bank statements on OO and 2nd homes. For more information, reach out to us, or meet us at the Philly MBA to discuss.”
Capital Markets
We learned last week that prices in August rose by the largest monthly percentage in 15 months. However, that month-over-month inflation was widely expected due to a surge in gasoline prices. Underlying oil prices are also pointing towards further increases in September. Meanwhile, core prices were up 0.3 percent and core goods prices declined by 0.1 percent. Over the last three months core prices have increased at an annualized pace of 2.4 percent, the lowest three-month pace since March 2021. Retail sales rose faster than analysts’ expectations in August, also due to higher gas prices. Many analysts expect consumer spending to slow as excess savings built up over the pandemic have materially declined and credit is increasingly costly and difficult to obtain. Additionally, the resumption of student loan payments is expected to cut into discretionary spending. It will take more than expectations of slower spending before the Federal Reserve feels inflation is firmly under control.
What could move mortgage rates this week? The U.S. Federal Reserve, Bank of England, Bank of Japan, and the central banks of Norway, Sweden, and Switzerland are all announcing rate decisions after a spate of recent inflation data shows that price increases are alive and well. The Fed’s Federal Open Market Committee (FOMC), the action arm of “the Fed,” is not expected to raise rates. It’s unlikely that the commentary around the commitment to keep fighting inflation and higher rates for longer will change either, but it could tilt a little more to the hawkish side after a stronger-than-anticipated inflation report for August.
The week could also see some extra drama on the political front as the countdown continues toward a potential government shutdown on October 1 in addition to the battle between the United Auto Workers (UAW) union and Detroit automakers. The auto worker strike could complicate Fed Chair Powell’s bid for a soft landing. Union leaders are asking for a 36 percent wage increase over four years, to match the similar recent pay increase for top executives. The union also wants pay to rise automatically with inflation in the future, as it did before the financial crisis.
This week brings the aforementioned FOMC meeting that begins tomorrow and concludes on Wednesday with the Statement, updated SEP (where fed funds projections will be closely scrutinized), and Chair Powell’s press conference. The treasury will also be in the headlines with more coupon auctions scheduled: $13 billion reopened 20-year bonds tomorrow and $15 billion reopened 10-year TIPS on Thursday. The only scheduled, probably non-market moving, news out today is the NAHB Housing Market Index for September. We begin the week with Agency MBS prices roughly unchanged from Friday, the 10-year yielding 4.34 after closing last week at 4.33 percent, and the 2-year is at 5.00 percent.
Employment
Are you more energized, more encouraged, and more motivated to succeed today than yesterday? Zig Ziglar famously stated, “People often say that motivation doesn’t last. Well, neither does bathing; that’s why we recommend it daily.” “As an industry leader, Thrive knows that motivation, discipline, and belief in your ability to succeed is critical,” stated Randell Gillespie, National Sales Leader for Thrive Mortgage. “There is no better time than now to find ways to continually motivate your team, which is why we put so much focus on daily opportunities like these at Thrive. Through our weekly High-Performance Coaching Calls, our very own nationally-recognized Marketing Master, James Duncan, leads these motivating and educational experiences for results. The biggest names in the mortgage industry and thought-leadership have been part of our Thrive Nation broadcasts. We want everyone to be better today than yesterday. Start a conversation with us and find out how.
“The fall season is here, and now more than ever is the time to build rapport with your referral partners and clients to maintain a steady stream of business. At Guaranteed Rate Affinity, not only do we have the greatest number of products, but we have the tech platform for our loan officers to do business from anywhere. With PowerVP, you can do anything from creating loan applications to sending pre-approval letters all from your mobile phone. Anything you could do from your desk, you can now do on the go with PowerVP. Gone are the days of being chained to your desk and missing out on important moments. Primarily, it gives you a work-life balance you never thought possible. Luckily, we’re hiring the best of the best loan officers to leverage our tech platform to grow their business. Ready to learn more? Contact Tim McGraw to get started.”
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Source: mortgagenewsdaily.com
Today is the 15th anniversary of the collapse of Lehman Brothers. The great financial crisis (GFC) revealed a defective supply chain, metrics unable to assess local risk and markets incapable of answering Ben Bernanke’s defining question – “what’s this stuff worth?”
The requirements of a Digital Housing Platform were well understood long before the crisis. The components needed to move housing past a costly, error prone, disconnected system include:
The DC3 platform launched in 1937 featured five components that had to be invented to make commercial air travel possible. Apple’s iPhone integrated 12 new components in 2007, and its reach has been extended to multiple vertical markets including banking. Housing finally has a Digital Platform that can attack several hard problems. What’s next?
Stuart McFarland is the former EVP Operations and CFO at Fannie Mae, EVP General Manager at GE Capital Mortgage Services, and CEO at GE Capital Asset Management.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Stuart McFarland at [email protected]
To contact the editor responsible for this story:
Tracey Velt at [email protected]
Source: housingwire.com
The question many in capital markets have been asking since the GSEs were put into conservatorship is this: Without Fannie, Freddie, or the Fed, who will buy the agency MBS? Today we are seeing this play out with a shortage of MBS buyers to the tune of about $2 billion in demand per day.
Supply and demand — when demand is low, MBS prices will drop at sale and the corresponding yields will rise.
Late last year, Laurie Goodman, the famed MBS expert and a leader at the Urban Institute in Washington, penned an article in Barrons to explain why rates were so high. She gives a very thorough explanation as to why the 30/10 spread is so high, stating, “Before and during the Great Financial Crisis, the Fannie Mae and Freddie Mac portfolios essentially served as shock absorbers, buying mortgage-backed securities, or MBS, when spreads were wide, selling when they narrowed.
“In 2009-2010, the combined portfolios were over $1.5 trillion. In the wake of the Great Financial Crisis, Fannie and Freddie have been mandated to reduce their portfolio size. The two portfolios together are now under $200 billion. Meanwhile, the Federal Reserve was a fairly consistent buyer of MBS after the financial crisis, as part of its quantitative easing strategy. But as of June 2022, the Fed began to allow its portfolio to run off.”
Today, as Laurie points out, the GSEs are restricted in what they can buy. Per the 4th amendment to the PSPA (preferred stock purchase agreement), essentially the governing document for the two companies in conservatorship, it is stated clearly. Historically, the GSEs could make up for the short in demand if needed.
For example, if the current short was absorbed by GSE purchases, the spread between 30-year mortgages and and the 10-year treasury would likely collapse to it’s more normalized level, likely bringing mortgage rates down about 100bps +/-.
But the PSPA 4th amendment states the following: “Limit Future Increases to the Retained Mortgage Portfolio: The PSPA cap on the GSEs’ retained mortgage portfolios will be lowered from the current cap of $250 billion to $225 billion by the end of 2022, aligning with the FHFA conservatorship cap the GSEs are required to comply with today, while providing the GSEs with flexibility to manage through the current economic environment. As of November 2020, Fannie Mae’s mortgage portfolio was $163 billion, and Freddie Mac’s mortgage portfolio was $193 billion.”
So why haven’t we seen spreads wider more often since conservatorship in 2008 until now? It’s simple really, the Federal Reserve engaged in three rounds of quantitative easing post-2008 during the Great Recession and then another massive round in the spring of 2020 due to COVID-19 recession fears. They created the short in supply that pushes prices up and yields down.
The problem now is that we have the greatest quandary in the markets. We are missing the two largest buyers of MBS on this planet. And to top it off, the FDIC is auctioning off the MBS and Treasury portfolios of the failed SVB, Signature, and First Republic Bank, which only increases supply into the market.
In a recent article in International Banking, Viral V. Acharya, C.V. Starr professor of economics, department of finance, New York University Stern School of Business (NYU-Stern), and Satish Mansukhani, managing director, investment strategy at Rithm Capital, state, “The Fed is thus caught between a rock and a hard place, with the demand- and supply-side effects of its tightening working in opposite directions. Which way will the pendulum swing? It is hard to know, but this may precisely be why interest-rate volatility has remained high.”
This is not a small market. Agency MBS is the dominant feature of the mortgage market with an approximate $9 trillion in outstanding volume. The hole being created here is enormous.
So what are the options?
First is to just leave this alone and let the markets function without interference. This would likely be the goal of fiscal conservatives who have argued that this excessive involvement by the Fed and the GSEs over decades has resulted in the market dysfunction we see today. Industry vet James Johnson penned a great piece for Rob Chrisman’s daily report in which he describes the current supply/demand conundrum and calls the period we are in as the “great reset,” a very appropriate reflection on the scenario today.
But there are other options to consider, and the reason to consider other options is because this excessive mortgage spread is hurting the people that this current administration is the most concerned with protecting.
High rates make affordability a significant barrier to homeownership. And with no end in sight, we as a nation are likely to only widen the opportunity gap between wealthier Americans and those with less means. First-time homebuyers and people of color who often have less inherited wealth and lower wages are the ones impacted the most in a time like this.
More importantly, this scenario is the unfortunate outcome of putting too much stimulus into the economy during COVID-19 combined with supply chain shortages that resulted in hyper inflation, leading us to todays scenario.
So option No. 2 is this: let the GSEs use their roughly $119bb available in remaining capacity within the limits of the PSPA to begin some purchase activity. And if there was a modification to the PSPA to allow a slightly higher balance, the GSEs could do what they have done all during the Great Recession and the COVID-19 pandemic and act as a “shock absorber” as Laurie Goodman describes. They could become tools to help stabilize a scenario, much of which was the result of the same set of agencies that produced the environment we are in today.
The unfortunate reality is that the FHFA would likely come under fire for using the permissible balance sheet to at least help temporarily. And those attacks would be something the administration would like to avoid in a heated election period. But this is an option and one that could help — particularly those who need the help the most and are now victims of hyper inflation that they did not participate in creating.
America is a great nation that has risen to beat back the Great Depression, two world wars, a variety of other conflicts, the oil patch crisis, and more leading up to the Great Recession and the COVID-19 crisis. But for the American dream, now threatened by this supply/demand imbalance, actions by federal agencies that played a partial role in the current scenario are also the ones that can help to balance out this dysfunction. And the ones who would be most impacted to the better would be those that need the help from our nation the most as they have been literally priced out of the housing market altogether.
And yes, there are other challenges, beginning with this terrible dearth in housing supply. But to use other variables as an excuse to not help here is a difficult argument to justify.
The bottom line is this, we have lost the biggest buyers of MBS in the world and this could keep rates artificially higher than would be the case in a more balanced supply versus demand environment. This is a project for the Biden administration to lead, which should include the NEC, Treasury, the Fed, HUD, and FHFA.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Dave Stevens at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]
Source: housingwire.com
The Federal Deposit Insurance Corporation is suing over a dozen mortgage firms in federal courts to recoup funds over loans they brokered over 14 years ago for Washington Mutual.
The agency in its complaints points to a combined 373 home loans it claims were defective for a variety of reasons, according to a National Mortgage News review of federal court records. While dollar amounts sought aren’t disclosed, some alleged bad underwriting for the loans in question includes five-figure kickbacks and six-figure borrower debts.
The FDIC’s pursuit stems from the fallout of its takeover of WaMu in 2008 during the Great Financial Crisis. Deutsche Bank, a trustee for mortgage-backed securities including the defective WaMu loans, sued the agency in 2009 for indemnification for its securities.
The sides reached a $3 billion settlement agreement in 2017, in which the FDIC issued a receivership certificate, which grants payments to Deutsche Bank as the FDIC recoups WaMu funds. The federal agency began requesting indemnification from mortgage companies in 2021 and none, according to court records, have acquiesced.
“I’m really quite concerned about them taking this stance when they stand in the shoes of those banks who were really at fault, lenders at fault, not the brokers who are just giving them information they asked for,” said Mukesh Advani, a Bay Area attorney representing defendant Cal Coast Financial.
The FDIC sued East Bay-based Cal Coast in August over 21 mortgages the company brokered for WaMu and its subsidiary, Long Beach Mortgage Co.
The FDIC declined to comment last week, while its counsel and other companies either declined to comment or didn’t respond to questions. Two lenders facing such lawsuits, Guild Mortgage and Supreme Lending, have responded to the FDIC’s complaints in brewing court battles.
The 14 firms named in lawsuits in the past 12 months range from small operations to major players, such as Freedom Mortgage. Mortgage companies are being sued for indemnification for as few as 14 loans, in Guild’s case, to as many as 72 loans from Benchmark Mortgage. The Plano, Texas-based Benchmark is scheduled to take the FDIC to trial next June, court records show.
Other businesses the FDIC is suing include American Nationwide Mortgage Co.; Lennar Mortgage; The Mortgage Link; Mortgage Management Consultants; New Jersey Lenders; PNC Bank as successor to smaller firms; Primary Residential Mortgage Inc.; Pulte Mortgage and RealFi Home Funding Corp.
The lawsuits are nearly uniform in length and language, describing the FDIC-WaMu receivership’s losses as arising from inaccurate and/or incomplete loan applications and documentation produced by the brokers.
Each company signed broker agreements with WaMu and its subsidiaries, such as Long Beach Mortgage, in 2004 and 2005, according to exhibits attached to each claim. The FDIC in each case includes an exhibit describing in brief the defects of each loan, the majority appearing to be misrepresented credit or income and debt.
In the FDIC’s lawsuit against Lennar, it alleges one borrower suggested a $60,000 monthly income, six times their actual earnings, while another homebuyer failed to disclose over $660,000 in mortgage debt from a previous property. Lennar last week declined to comment on pending litigation.
Each lawsuit also cites a six-year limitation to file claims following the 2017 Deutsche Bank agreement, and attorneys for lenders said they anticipate more FDIC complaints against lenders.
James Brody, an attorney with Irvine-based Garris Horn LLP, represents Guild and was recently retained by The Mortgage Link in its own FDIC litigation. In regards to the Guild lawsuit, Brody shared a statement this week calling the FDIC’s case “extremely weak” and noted the complaint’s lack of specifics around losses attributable to Guild’s brokered loans.
“We certainly anticipate that there will be a number of motions for summary judgment that will be filed with the Court by most if not all parties that don’t decide to settle out because of their own cost/benefit considerations,” he wrote.
Guild anticipates filing a motion for summary judgment to dismiss the lawsuit, Brody said.
Source: nationalmortgagenews.com