Leading in Crisis - Or Not

Our industry is in a crisis. And for our friends in Washington who lay claims to being leaders, the crisis is not the CFPB enforcement, buybacks, proposed Basel rules, or the many other ongoing policy battles we face. The crisis is that high rates are crushing our businesses. Pipelines are drying up rapidly and the question many LO’s are asking is, “can I survive until rates improve?”.

Yes, these policy issues are important - but the crisis in front of us is where our industry needs real leadership. And we need it now. Yes, Basel is a battle, but multiple organizations are fighting that one. For the mortgage and housing industry interest rates are the real crisis - and nothing more. This issue, and this alone, should lead as the top priorities of leaders.

Odeta Kushi, the Deputy Chief Economist for First American, authored an article called, Will The Mortgage Spread Narrow or Not? That Is The Question . In her piece she highlighted the elephant in the room stating, “The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. Since the end of the Great Recession, the 30-year, fixed mortgage rate has on average remained 1.7 percentage points (170 basis points) higher than the 10-year Treasury bond yield. The spread in today’s market is closer to 3 percentage points.”

In other words, if the market were normalized rates today would be in the low 6% range. So the question is, why is the happening and what can be done about it? More importantly does this matter to anyone beyond those who make a living making mortgages? Let’s start with the second question.

The Biden administration has spent a great deal of time talking about programs and efforts to help first time home buyers, especially minority’s and single parent households. But rising rates are a direct hit to lower income families when trying to buy a home. In fact the share of home loans taken out by low-income borrowers falls by 16% when interest rates rise by one percentage point, according to a Federal Reserve Board working paper published earlier this year . Under the same rate environment, the percentage of purchase mortgages going to both moderate- and low-income borrowers drops by 7.5%.

Bottom line here? The administration owes it the families they worry about the most to work on at least bringing these wide spreads back to normalized levels. So the question is, how?

1. The GSE’s historically were one of the largest purchasers of agency MBS prior to conservatorship. Today under the PSPA they are capped at $240bb. But they could fill a void here and help bring rates lower. An amendment to the PSPA could allow for some flexibility in acquisitions based on market conditions. And to be clear, it could be accretive to earnings. In Fannie Mae’s Q2 10-Q their average weighted cost of funds was 2.2%. Their low borrowing costs reflects their AAA (or AA+) rating which gives them a borrowing ability similar to the Fed. And with current coupon mortgages the ability to earn a spread while helping thousands of first time homebuyers could be significant and profitable at low risk levels.
2. The Federal Reserve, especially since conservatorship of the GSE’s, has been the single largest buyer of agency MBS. And during the COVID pandemic they came in with the largest round of purchase activity ever seen in the history of this nation. In fact, they overshot the reality of the market…..they over corrected. Their purchase activity drove mortgage rates down to the low 2% range but between their action and other one’s like the Cares Act, Washington infused an extraordinary amount of inflation into the economy that turned out to be unnecessary and costly on the back end. And yes, supply side shortages due to the shutdown also played a large role. But the rising fed funds rates we are seeing, along with really poor semantics coming from the fed at the monthly meetings, has been a key driver to pushing mortgage rates into the low 7% range where they are today. The Fed and the Administration owe it to the American people and to struggling potential homebuyers who have been shut out of the opportunity solely because of rates. And in this case the Fed is not hurting the wealthy, they are solely crushing opportunity for those on the margin, and it’s a mess that they played a large role in creating. So the solution is this, buy up the excess. It’s running about $2bb per day and won’t last long. In fact if the fed were to step in, others would follow.

Some of our industries voices in Washington will try to discount this. They will say that you cannot be effective here so why bother. But my answer to this is simple; the industry wants to see its representatives “charge the hill” on their behalf whether they win or lose. For lenders, this is their crisis. Many may not survive this winter and thousands of potential homeowners will be left on the sidelines. This administration and the last one played a large role in putting us where we are today. They created too big of a short during QE and now they have an obligation to deal with this mess of QT that has caused this 100-130 basis point additional hit to mortgage rates that we are seeing today.

As one executive of a smaller IMB trade group said to me today “If you don’t show up at the dance - you have no chance getting to dance. In addition to fighting for your members (1) sometimes one group or person’s leadership goads others out into the open to do the same - creating a force and (2) politics and conditions can change on a dime and when that happens early leadership can make a difference”.

So my call to arms is simple - demand that all the voices at the state and federal level focus on what’s most urgent to the survival of our industry as well as to the spoiled dreams now facing many first time homebuyers: mortgage rates.

Demand leadership.