"The Consumer Financial Protection Bureau is on the verge of revising the qualified mortgage rule by proposing to move away from a debt-to-income-centric rule to one based on pricing," write
Washington is a town where housing policy mavens focus on legal and regulatory changes, but they can't actually price a loan. Of course, regulatory changes are important in the grand scheme, but their impact doesn't reach the magnitude of financial markets gyrations. With the onset of COVID and the resulting reaction by the Federal Reserve Board and other agencies, market pressures have reduced credit availability significantly.
National Mortgage News solicited opinions from the C-suites of top nonbank mortgage issuers, the firms that are making and aggregating most loans in the U.S. today. "There are definitely a few themes in the market given the operational capacity constraints versus demand, and the credit environment in general," one top five capital markets trader opined.
Even as mortgage issuance surges and secondary loan market profits are at decade highs, the industry is under considerable stress. Mortgage originators lack adequate financing and thus are looking to maximize revenue throughput with less complicated loans. This means more streamline refi, more agency and government, less self-employed borrowers. And no non-QM thanks very much.
Lending margins remain high as result of capacity constraints on originations, both operationally and in terms of warehouse and gestational financing capacity. While the big banks did step back from buying third-party production after March, reversing a promising trend, they have largely maintained commercial financing for lenders and servicers.
But as the new issue market has seen volumes grow by high double-digit percentages in the past six months, the volume of bank financing has not kept pace.
Smaller banks and dealers are filling some of the gap, but the lack of flexibility in bank funding is becoming a serious constraint for some firms in terms of lending to low-income borrowers.
The chart from SIFMA illustrates the massive surge in new issuance of mortgage-backed securities.
Given that primary-secondary market spreads are still approximately 65 basis points above normal and volumes are climbing, there is no reason for lenders to stretch into lower credit given the interest rate environment. The bottom third of the market for both agency and government loans is essentially being selected out, in part because of the active manipulation of the market by the Fed. This is an unanticipated consequence of Fed open market operations, namely a flight to quality by home lenders.
"Like all credit cycles," notes another top five operator, "as operational capacity in the industry catches up with demand, margins will tighten and originators will start to focus on lower credit opportunities." He adds, "Doesn't feel like that is happening soon ... ."
"When interest rates fall, credit tightens because when capacity is tight and a company can do any loan, as in any excess supply environment, you spend the least to do the most," the CEO of a top government lender tells National Mortgage News. "This is the low-hanging-fruit theory. You work harder and take more risk as you become more volume-challenged."
Indeed, what we see today in the mortgage markets in terms of access to mortgage finance is credit supply and demand at work. Liquidity behaves this way as well. If there is more demand for the liquidity you provide, price goes up until demand weakens. So do credit parameters, which work in the same manner as liquidity. Better loans get better execution in the secondary market.
You can see the market rule at work, both for loans and funding. In March, when secondary markets almost froze up, the first products to disappear were non-QM loans and prime jumbos. The mainstream products that are TBA-eligible in the agency and government loan markets were largely unaffected, especially when the Fed started to purchase MBS with both hands as it resumed "quantitative easing" or QE.
One former Fed of New York official told National Mortgage News, "A decade ago, we bought a trillion dollars in MBS in a year. In 2020, we did that in a matter of weeks." And the Fed is continuing to purchase a significant portion of total market issuance, even as lending volumes soar.
Less liquid, specialized products like floating-rate mortgages and specified pools of agency and government loans essentially stopped trading for months. The co-issue market stopped. And the accumulation of forbearance loans due to COVID created a financing burden for the industry the resolution of which has yet to be defined.
Another undercurrent in the market that affects access to credit has to do with the question of loan repurchase demands and private mortgage insurance in the conventional market. The age-old worry about the possibility that a COVID-related forborne loan could eventually result in Fannie Mae or Freddie Mac seeking repurchase (after the private mortgage insurers refuse to pay) makes lenders very shy about taking risk on anything other than a pristine borrower.
And perhaps the biggest disincentive for lenders to maintain access to credit is the uncertain outlook for the U.S. economy and employment. Levels of unemployment, while improving somewhat remain very high. For many lenders, this means less government lending in general and higher FICOs for government loans. Again, why take credit risk when volumes are rising and capacity is constrained?
Sad to say, while conventional and government loans are experiencing a boom unlike any seen since the early 2000s, jumbo and non-QM markets are not a priority for most lenders given the amount of relatively easy to process agency loans.
"We have very liquid markets for agency and government securities," notes the capital markets trader. "There are large pay-ups back in the specified pool market for slow pay paper. TBA remains very liquid with the Fed buying half the origination volume every day."
The good news is that lenders are starting to see some interest in whole loans again, as the private-label market comes back from a credit spread standpoint, but the threat of put-backs due to forbearance is still a lingering concern in conventional loans.
Significantly, the prime jumbo market that is part of the $3 trillion bank portfolio remains illiquid and dysfunctional. For policymakers concerned with access to credit, they can take some solace in the fact that while many low-income households cannot get credit to buy a home, many wealthy Americans today also face an illiquid market for residential mortgages.
