Personal and Business Reflections

I don’t think you can separate your work and personal life. Each impacts the other to varying degrees. For many people right now, there is fear on both sides. This article, whose content is gleaned from the genius that is David Battany, EVP of Capital Markets at Guild, is intended as a deep dive into what is impacting the mortgage markets. I would however be tone deaf to not recognize the deeper uncertainty that everyone is carrying with them at the end of the day when it is quiet and dark.

 No matter what label applies to you, and there are many we are currently using to divide us, what we are walking through will leave no one untouched. Physically, financially, emotionally, and spiritually these times will test us and cause us to reassess priorities. They will cause many heartaches and tears. They will also bring out the very best in us. On the other side of this can be stronger relationships and a world where grace and compassion are much more freely given. I pray that the sick and vulnerable will have health and comfort and that each of us will look for daily opportunities to be hopeful and heroic.

MORTGAGE DEEP DIVE (a.k.a. More than you want to know)

The detailed factors below have significantly impacted the pricing, qualification requirements and even availability of FHA, VA, USDA, Jumbo and Non-QM loans. We should expect these trends to continue. Many mortgage lenders took significant hits last week.  Many were stuck with Non-QM loans that they had already funded and are taking large loses because their investors shut down without buying them, and there are few if any other investors anywhere willing to buy these loans.  Many lenders had margin calls from their Wall Street dealers that either depleted their operating cash or they simply failed to make their margin call, putting them in default on their trading line agreement and then also triggering defaults on their warehouse lines.  In addition, many lenders this week lost their access to Fannie Mae, Freddie Mac or Ginnie Mae as the co-issue market entirely shut down this week.  For some of these lenders this may also result in a reduction or withdrawal of their warehouse lines.  Let's dive in.

1.      Fed Buying of Mortgage Backed Securities and US Treasuries  

The Federal Reserve has stepped up their commitment to buy MBS and US Treasury bonds, moving from last week’s position of only buying a specific amount of bonds, to now saying they will buy whatever amount of bonds will be necessary to support the US economy until we get through the COVID-19 virus.  The markets interpreted this in combination with the stimulus package as a significant step towards stability and recovery. In general, this will be good news for the stock markets and should keep an upwards pressure on stock prices. In a normal market, improving stock prices will push down bond prices and thus push up interest rates.  However, because of the Fed’s previous commitments to buy MBS, we should see a short-term market where both stock and MBS bond prices are improving at the same time.

2.      Market Volatility

The stock and bond markets seek to take in all known existing data and all expectations of forecasted future data to determine what today’s market price should be for a given stock or bond.  The capital markets are very efficient in how they price in all known facts but are not efficient in how they analyze rapidly changing and unknown future expectations.    Every day when we see large up and down moves in stock and bond prices, this is telling us that the markets still have not yet figured out what the actual impact of the COVID-19 virus will be to the US and world economies. Everyone knows there will be a significant impact to the US economy, but the key question is has the stock market sell-off in the last several weeks been too much or not enough to price in the actual impact to US economy once this is fully known?

On many days MBS prices have been changing by 1.00 point or more within ten minutes. This extreme volatility makes it very difficult for the mortgage industry to price and manage rate sheets to offer a rate lock to a borrower, when the market may not be there a few minutes later for the lender to sell the loan into.   Additionally, a borrower’s ability to keep a rate lock only if the market moves in their favor and walk away or renegotiate if the market moves the other direction also adds significant costs to the mortgage industry.  The ideal scenario for the mortgage industry and borrowers is to have low market volatility and bond prices to consistently move in one direction as the overall economy is expanding or contracting.  This lowers the friction costs in the system and gives borrower the most efficient cost to lock their loans.   

 3.      Direct Fannie Mae, Freddie Mac or Ginnie Mae Access

Many mortgage lenders do not have the ability to sell loans directly to one of the agencies.  They must rely upon an intermediary to allow them to deliver directly under what the industry calls a “co-issue” structure.    As a result of market volatility, most all co-issue entities stopped doing business this week.  This has deprived many mortgage lenders of the ability to sell loans directly to one of the agencies.  

4.      Non-QM Mortgage Market Evaporation

Non-QM mortgages are loans which do not meet all the requirements of the CFPB’s Qualified Mortgage rule.  These are generally loans that have credit parameters outside of what Fannie Mae, Freddie Mac, or HUD will allow. The investors who offer these loans bundle them up and sell them into private label securities (PLS).    The PLS market is very small and illiquid even in good times.  All the Non-QM specialty lenders who have entered the market in the past few years entirely depend on private investors and the PLS market to fund the loans they originate. 

When markets become very volatile, investors do not want to own weird, illiquid MBS bonds, so literally there is zero investor bid for any PLS in today’s market.   This week, the market bid for any PLS completely collapsed, so the Non-QM lenders could not find any buyers for their products.  As a result, every Non-QM lender shut down their operations this week and, in some cases, lenders had no advance notice and were stuck with funded loans that they can no longer sell to any market investor.

5.      Jumbo Market Disruption

There has been a major pull back in the jumbo market this week by jumbo investors.   Jumbo loans are either priced to a private label security (PLS) or to a bank’s portfolio.   The PLS market has completely evaporated this week, so the only option left are bank portfolios.  Most bank portfolio managers are not super excited to hold low rate, 30-year fixed loans on their books.   Banks borrower funds on a very short term basis, and it is risky for them to make long term loans, as this is how the Savings and Loan crisis in the 1990’s occurred, when the Savings and Loans cost of funds had increased to a higher rate than they were earning on their portfolio loans, and they were earning a negative return every day, forcing them into bankruptcy.

 6.      Government Loan Market Disruption

There are two market forces which are both negatively impacting the government market for FHA, VA and USDA loan prices. Prepayment speeds and servicing advance have had material impact on the total market value of these loans, which is why, with current market conditions they have been hit harder than conventional mortgages.

  Super-Fast Prepayment Speeds

All government loans are sold into Ginnie Mae securities.  Ginnie Mae buyers will buy securities at what the market calls “premium” prices, meaning they pay a price of 103 to 105% of the face value of the Ginnie Mae security.   A price of 103-105 translates to a 3-5% premium that a mortgage lender would receive when they sell a Ginnie Mae security. This allows lenders to use this premium to cover much of their origination costs, so government loan borrowers can pay less points at closing.   

The problem is that the FHA and VA streamline refinance programs have allowed the proliferation of online refinance-only lenders who only do streamline refinances, and they attempt to refinance the same borrowers over and over every six months.  The result is that Ginnie Mae securities which used to have average lives of about 8 years are now being decimated by this refinance churning. Investors are seeing almost the entire security refinance away within the first year.  The problem is that the Ginnie Mae investor who paid a 105 price to buy the security, only gets paid back at a price of 100 when every loan prepays and refinances out of the pool, causing an immediate 5-point loss to the investor.   As a result Ginnie Mae investors have really lost their appetite to buy Ginnie Mae securities, and the premium priced Ginnie Mae’s have dropped dramatically, resulting in mortgage lenders’ having FHA and VA rate sheets without any premium pricing, meaning borrowers would have to pay points to lock most FHA and VA loans on most days.

Ginnie Mae Servicing Advances

For lenders who service loans sold into Ginnie Mae securities, whenever the borrower does not make their loan payment, the servicer is required to make the payment and forward the payment to Ginnie Mae.  This is called a servicing advance, and the servicer will eventually get this money back, but it normally takes many months. With the recent government moratoriums allowing borrowers to not make their payments for three months, this directly hits the pockets of the servicers who now must write these checks. As a result, most government mortgage lenders are not too excited to add new Ginnie Mae servicing to their books, and they are having a hard time finding any other servicers that they could sell their loans to.  The value of servicing a Ginnie Mae loan has usually been worth 1.00 point or more to a servicer, and this value is passed through on the lender’s rate sheet.  In the current market, many servicing investors are not willing to buy Ginnie Mae servicing at any price, so this has caused an industry-wide hit to all FHA and VA rate sheets of at least 1.00 point. All FHA and VA loans have had much higher hits to their rate sheet prices as investors do not want to buy the Ginnie Mae bonds and servicers do not want to own Ginnie Mae servicing.  

Change is the only constant. Markets will adapt as will we. Please contact me if you need any advice or assistance navigating these uncertain times. I would love the opportunity to be hopeful and heroic. To your Peace, Joy and Success.

Don

8126 S. Mingo Rd., Suite 200 Tulsa, OK 74133   918-505-5920  [email protected] L.O. NMLS ID #453975

I am authorized to do business in the states of Arkansas, Colorado, Kansas, Missouri, Oklahoma and Texas.

Guild Mortgage Company is an Equal Housing Lender; AZ BK #0018883; Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; Georgia Residential Mortgage Licensee; GA #6268; Licensed by the Mississippi Department of Banking and Consumer Finance; Licensed by the New Hampshire Banking Department; NV Banker #1076 / NV Broker #1141; OR ML-176; Rhode Island Licensed Lender; State of Missouri Principal Location: 17280 North Outer 40, Ste. 101, Chesterfield, MO 63005; Company NMLS ID 3274. https://www.nmlsconsumeraccess.org. All loans subject to underwriter approval. Terms and conditions apply, subject to change without notice. Guild Mortgage Company is an Equal Opportunity Employer. Guild Mortgage Company 5898 Copley Drive San Diego, CA 92111; For more licensing information, please visit https://www.guildmortgage.com/licensing.