Mortgage Watch Update: April 3, 20220-Rod Shuster
This is lengthy but it is a good background. Currently, the turbulence in the mortgage markets is causing several issues including the following:
1. Rapid rate drop – A couple of weeks ago, rates dropped over 1% to all-time lows. The media, as well as those of us in the business, saw this as an opportunity to refinance, consolidate debt and/or purchase a home. It is estimated that of the $11Trillion of mortgage debt that over half could benefit from a refinance at that level. Our industry can handle about $2 – $2.5Trillion of mortgage volume (purchase and refinance) in any given year. The pressure on the system created by this demand was unpredictable, enormous and unprecedented. So, the industry “puts the brakes on” by increasing interest rates reduce demand while waiting for pipelines to level off.
2. Early Payoffs/Mortgage Servicing Rights – The mortgage industry works and stays fluid by having companies originate and close loans. Once completed, those closed loans are sold in the secondary market to replenish their bank accounts and warehouse lines so they can loan more money out to the next customers. When the loan is sold in the secondary market, the right to collect mortgage payments are called mortgage servicing rights (MSRs). Companies that hold MSRs provide funds to mortgage companies so they can make more loans. They can purchase more loans by borrowing against the value of the MSR portfolio. However, today, we have two major issues that are negatively affecting these values:
A. Run-off – This is simply refinancing and paying off the existing loan. Keep in mind that when MSRs are purchased, it is assumed that consumers will continue to pay the mortgages for 5-7 years and it generally takes about 3 years for them to break even on the purchase of MSRs. So, when a loan is refinanced in 6months to 3years after origination, it severely impacts the MSR companies.
B. Defaults – Generally, when payments are not being made on mortgages (ie. Job loss and/or financial challenges), it is the mortgage servicing company’s responsibility to continue to make the PITI payments on behalf of the borrower which they may or may not recoup in the future. So, not only would they not be receiving payments, but they continue to have to make the expenditure.
Both Run-off and Defaults are currently causing the MSR companies to substantially devalue and therefore they cannot pay out as much to the lenders to buy more loans. This causes lenders to have less money available to loan out for the next mortgages.
3. Liquidity – When a lender originates/closes a loan, it is sold on the secondary market. Generally, when you see the stock market come down, the money moves into bonds and mortgage-backed securities (MBS) causing bond prices to rise and interest rates to fall (good for mortgages). However, this time, due to uncertainty institutions are not purchasing MBS at near the levels they have in the past. The mortgage lenders need these bonds to be purchased so they can continue to loan money. So, the FED steps in and does there part to purchase large amounts of these bonds causing rates to drop and that starts the cycle over again. Now with the roller-coaster rates, we have a new issue: Lenders protect rate locks by “shorting” MBS securities with a broker/dealer. The issue here is that when rates drop causing the “short” position to be “out-of-the-money”, the broker/dealer calls the lender and requires a large payment ($10mm – $50mm and higher) for some of the larger lenders. These payments (margin calls) were detrimental to the mortgage companies causing lenders to run out of cash.
So, what are we doing…continuing to be patient. We ask that our clients who want to take advantage of lower rates, fill out our online loan application and upload all of their documents so we can be ready to lock when the timing is right. We will watch for rates to “settle in” to new normals or lock-in when they temporarily dip. In the meantime, our processing team will continue to do as much work as we can until we lock.
As always, please let me know if you have any questions through our contact us page and I hope this was helpful.
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