As 2023 draws to a close, a tough year is approaching for the housing market. Compared to the boom years of 2020 and 2021, this year was marked by rising interest rates, soaring home prices, inventory shortages, and weak mortgage originations.
Additionally, significant declines in mortgage originations, liquidity challenges, and interest rate fluctuations have wreaked havoc on whole loan transactions and private label and agency securitization channels, resulting in a decline in the secondary market that creates liquidity for mortgage lenders. It’s been a very tough year.
“The market gradually deteriorated from around early July 2022, and then throughout 2023. federal reserve Rising interest rates and a lack of liquidity in the banking sector,” said John Twohig, head of whole loan trading. raymond james All loan desks and president Raymond James Mortgage Co., Ltd. “For first-lien mortgages…volumes are down from peak levels in 2021 and 2022.
“This is primarily due to rapid changes in interest rates rather than credit performance, with loans now trading at quite deep discounts. Although it is driven purely by interest rate risk, , also caused by lack of liquidity and loss of deposits in the banking system. [a major purchaser of whole loans and mortgage-backed securities in the past]”
Interest rate and liquidity issues also negatively impacted government agencies (Fanny Mapicture, freddie mac and Ginny Mae) Mortgage-backed securities (MBS) market in 2023.
Latest report from real estate investment company amherst group forecasts that net agency MBS issuance in 2023 will total $250 billion, compared to $530 billion last year. These numbers reflect a significant decline in new and existing home sales and refinances as the Federal Reserve’s aggressive monetary tightening policies caused interest rates to rise more than 7% over the period. There is.
By comparison, net issuance of MBS by government agencies was $870 billion in 2021, when interest rates were half what they are today, Amherst said. Net issuance of MBS represents newly issued securities less any reduction in outstanding securities due to principal repayments or prepayments.
Spread expansion
Adding to the woes of the agency MBS market are the huge spreads. with a spread The interest rate differential between a 30-year fixed mortgage and the benchmark 10-year government bond was hovering around 2.9 percentage points as of early December, but historically the spread has ranged from 1 to 2 percentage points. Its wide spread is Margins under pressure At the agency MBS, 6% coupon included For example, at the end of 2023, trade in fractions It was 1 percentage point above par, down from nearly 10 points above par at the end of last year’s first quarter.
Amherst Chairman and CEO Sean Dobson said the agency MBS unit’s shrinking margins are a byproduct of paper oversupply and investors sharply shrinking their balance sheets to absorb debt. Stated. He explained that until last year, the primary purchaser of agency MBS was the Federal Reserve, which now allows up to $35 billion of MBS to be taken off its balance sheet each month.
The diminished role of the Fed and other investors in the agency MBS market, where they act as a kind of governor of interest rates, no longer provides significant downward traction. As the volume of origination increases and the associated issuance of MBS increases, the supply of MBS sold in the market also increases, creating downward pressure on prices, assuming buyer demand remains subdued.
Andrew Rose, Senior Director and Head of Trading Mortgage Capital TradingLoan originators are trying to estimate where the end investor will buy the loan, he said, “so whether it’s an entire loan or a securitization, they’re trying to figure out exactly what that price is going to be.” “There is,” he said.
“Then independent mortgage banks (IMBs) will be able to originate loans up to that level because that’s how they actually manage that margin,” he added. “And if the investor you were expecting suddenly spent $103 or $104; [for that loan or MBS] is now 102, which is a huge blow to the volume of originations that were expecting prices to be 1-2 points higher. ”
Dobson said that towards the end of 2023, the securitization market is “currently structurally compromised due to the presence of conventional sponsors”. [investor] There is no base. ”
“Some of them are going to leave forever, and some of them are going to have to basically rebuild their capabilities,” he said. “…This is somewhat speculative, but if interest rates go down, and if they go up significantly; [new MBS] The market will be in very difficult conditions as refinancing activity creates supply.
“…So the question is, what is the new level to get it?” [MBS] When regular sponsors clear [investors, such as the Fed] Offline, the new level is excess return, which is about 50 basis points wider than corporate bonds. ”
In 2023, the Federal Reserve and the banking sector exit the agency MBS market, creating a combined $425 billion in excess MBS that will be absorbed by other investors such as money managers and investors, Amherst said. We anticipate that it will be necessary. Foreign investors.
“I think the Fed is not going to sell MBS and is prepared to continue depleting its portfolio even if they start cutting rates,” said Richard Koss, principal research officer at the mortgage data analysis firm. Recursion.
“The central bank has shown an interest in reducing its role in the mortgage market and is willing to cut rates further if necessary, rather than delaying the process of reducing its MBS holdings,” Koss added.
bank downsizing
In addition to the Fed’s declining role in the MBS market, the banking industry and other investors are also pulling back from MBS purchases due to financial pressures from rising interest rates and regulators’ plans to tighten bank capital reserves. rule.
“The issue is… the benchmark of fairness.” [MBS] Value was set when GSE [government-sponsored enterprises, Fannie and Freddie] maybe you can buy it [MBS]when banks were able to manage huge balance sheets, REITs [real estate investment trusts] When you were able to run a large balance sheet, but the local banking system was not. [impaired]” Dobson said.
Over the past year, many large banks have failed. silicon valley bank, signature bank, First Republic Bank and signature bank.
“I think there are seven or eight banks in total that have withdrawn from warehouse financing this year. [such as Comerica and First Third Bank],” Said charlie clarkSenior Vice President and Mortgage Warehouse Finance Officer everbank (previously known as) TIAA Bank). This division does warehouse financing and his MSR financing, and performs “all operations related to financing IMBs.” [independent mortgage banks]” Clark said.
As of the end of the third quarter of this year, the top 15 warehouse lenders had expanded nearly $80 billion in warehouse line contracts, representing about 80% of the market, according to one study. Inside Mortgage Finance report.
“We were not involved in this, but there was definitely a funding and liquidity issue.” [for banks this year]”It’s not just a general liquidity issue, but also the cost of funding on margin,” he added. “So deposits were not only difficult to find, but also expensive.
“When you look at things like warehouse rentals, [to IMBs], the spread is very tight. If you’re a bank that’s having liquidity and funding problems, what are you going to cut? You’re going to go to the bottom spread and cut, right? ”
Other fields
The same goes for the private label mortgage-backed securities (RMBS) market.
year-end forecast report by Kroll bond rating agency (KBRA) projects RMBS issuance in 2023 to be approximately $52 billion, down nearly 50% from 2022 and $10 billion below KBRA’s original forecast in November 2022 . KBRA includes prime, non-prime, credit risk transfer transactions, and credit risk transfer transactions. Provision of second lien rights in RMBS analysis.
“[Reduced] Continued volatility in mortgage volume and spreads in a rising interest rate environment contributed to the significant decline in issuance. [in 2023]” states KBRA’s recent forecast report.
Ben Hunsaker, Portfolio Manager, Focus on Securitized Credit Beach Point Capital ManagementHe said that for the housing market to grow substantially, there would need to be a significant increase in mortgage originations, along with an increase in the number of securitizations, but “that doesn’t seem likely at this point.”
“If the Fed cuts interest rates, [the benchmark rate by] 250 basis points, I don’t know if that’s necessarily a scenario where there’s a lot of housing circulation and strong housing prices. Because it’s probably pretty correlated with really weak consumer and recession-type outcomes. ” he added. “And we need to widen the spread.” [due to increased risk]This means that the value of creating and securitizing these mortgages is once again hampered. ”
If there is a bright spot in the secondary market in 2023, it will be the mortgage servicing rights (MSR) sector. Performance improves in a rising interest rate environment as the rate of mortgage prepayments slows to very low levels and returns from park escrow deposits also rise. — both of which help increase his MSR value. MSR sector trading volume in 2023 Tom Piercy, chief growth officer at Incenter Capital Advisors(Before Incenter Mortgage Advisor).
“Towards 2022 [on MSR trading volume]My number is just around 1.1 trillion, and I expect it to be slightly higher than that in 2023,” Piercy said. “But I think that [trading volume] has been front-end loaded over the first six to seven months of this year…However, capital commitments to invest in MSRs are increasing from both traditional banks and non-bank servicers, as well as MSR investors. You can still see it.
“So I’m still pretty bullish about where we are today as I project capital and the market’s ability to absorb MSR.”