Relief from the rate-induced volume reduction plaguing the primary and secondary mortgage markets should be elusive for some time to come, at least in terms of refinancing stimulus.
That’s according to David Petrosinelli, a New York-based senior trader with InsphereXa technology-focused securities underwriter and distributor that operates multiple trading desks across the country.
“We’re going to have a Fed-induced slowdown in consumption,” Petrosinelli said. “We are going to have a housing correction.”
This correction, well underway, has already delivered a hammer blow to the performance of private label and agency mortgage-backed securities (MBS) markets, which are closely tied to lenders’ success in growing mortgages. . The Federal Reserve’s rate-hike campaign to fight inflation has significantly cooled originations in the primary mortgage market, with some lenders’ origination volume down as much as 75% year-over-year. other.
As a result, the collateral available to support securitizations in agency and non-agency secondary markets has also diminished.
There will be a lag between when people refi because even if there is a price incentive to do so, there may not be a price incentive to do so.
David Petrosinelli Managing Director at InsphereX
Petrosinelli said that even if the Fed takes its foot off the accelerator on the rates front in the first quarter of next year, as some market experts predict, it could happen at the best of times, it there will always be a lag effect before conditions improve. for the housing sector.
“The Fed on average … over the past two decades has typically cut rates about four or five months after the fed funds rate peaked,” he said. The Fed could start cutting rates by June [of next year]in summer, by this metric.
“But it’s not just rates, because property values will probably have continued to fall as well, so ultimately if you want to refi, I don’t imagine it would be very easy to do that if you lose 5% for 10% We will have a lag with when people refi because even if there is a price incentive to do so, there may not be a price incentive to do so.
HousingWire spoke to half a dozen industry professionals in the primary and secondary markets to find out when normalcy might return.
Dark Outlook
A recent report on the private label residential mortgage-backed securities (RMBS) industry by the Kroll bond rating agency (KBRA) reveals that the bleak outlook for the mortgage origination market is also spilling over to the secondary market.
“Unsurprisingly, 30-year mortgage rates are close to 7%, up almost 5 points this year, a virtually unfathomable level over the past decade,” the KBRA report said. “The magnitude and speed of this change contributed to an unfavorable spread environment which continued to negatively affect issuance across all RMBS sectors in [the second half of] 2022.”
KBRA defines RMBS as all non-agency, non-prime (including non-QM) premium and credit risk transfer issues.
We expect the fourth quarter of 2022 to be the lowest RMBS securitization issuance volume of any quarter since 2016, closing at less than $6 billion.
Analysts at Kroll Bond Rating Agency
“KBRA now expects RMBS issuance for the year 2022 to exceed $102 billion,” the report continues, “from $122 billion [in 2021]. Such a result would equate to a nearly 17% decline from 2021 volume.”
On the positive side, KBRA also notes that 2022 will still be the second highest year of RMBS issuance since the global financial crisis some 15 years ago and nearly double the $55 billion issuance mark in 2020. Yet much of this good news for 2022 is front loaded.
“In terms of quarterly issuance, it declined rapidly in Q3 2022 and fell short of our projected issuance expectation of $20 billion, instead closing at nearly $17 billion,” the report said. “Similarly, we expect the fourth quarter of 2022 to be the lowest RMBS securitization issuance volume of any quarter since 2016, closing at less than $6 billion.”
For 2023, the KBRA expects the mortgage interest rate environment to remain elevated “along with other industry headwinds including lower house prices, high inflation and potential volatility due to changing economic conditions and geopolitics”.
These factors will contribute to a 40% drop in RMBS volume in 2023, to $61 billion, according to KBRA projections.
According to Robbie Chrisman, chief content officer at Mortgage capital negotiation (MCT).
“Gross issuance of all agency mortgage bonds has fallen for eight straight months to now stand at its lowest level since April 2019, below $100 billion a month and about a third of what we know at this point last year,” Chrisman wrote in a November Market Outlook report. “This trend is unlikely to change at the start of the new year, as December, especially its second half, has the lowest average daily trading volume for any period of the year.”
Gross issuance of agency mortgage bonds, Chrisman notes, is expected to end in 2022 at about $1.8 trillion, compared to the average of $3.3 trillion recorded during the boom years of 2020 and 2021.
The decline in agency and non-agency MBS issuance makes sense considering the most recent origination forecast by the Mortgage Bankers Associationwhich shows that overall loan production has fallen from $4.43 trillion in 2022 to $2.24 trillion for this year and $1.97 for 2023. Most of this decline is in highly sensitive refinancing rate.
MBS Challenges
From the perspective of investors and brokers, Petrosinelli said, the current MBS market is not very attractive given the volatile rate environment.
“I remember the first bonds I bought [decades ago]“, he recalls. “My boss kind of looked at me and scratched his head. I said, ‘Look at the performance of this bond.’ And he said, “Well, the coupon is 200 basis points below fed funds.”
If the bond’s coupon rate is lower than prevailing interest rates, the bond’s price is discounted. This can be a problem for the bondholder in a rising rate environment.
“…Especially if you’re a broker, owning this type of coupon, you’re upside down to begin with because there’s a cost of carry with that,” Petrosinelli added. “So you have to take all of your profits on price appreciation.”
“It’s just a tough scenario to be really excited about, and that’s probably one of the reasons why you see the street really isn’t flush with [RMBS] inventory now, to put it mildly.
Until the Fed completes its hike cycle, volatility and illiquidity in the secondary market will continue,” he said. “Once the Fed stops raising rates, one would expect the market to normalize.
Andrew Rhodes, Senior Director and Head of Trading at MCT
Thomas Yoon, Chairman and CEO of a non-QM lender Excelerate Capital, said the lender had postponed plans to conduct its first private label securitization offering this year “because the last thing we want to do is go to market for the first time and get crushed” . He added that “the bounty disappears [on a securitization deal] if rates jump too quickly.
” In the worst case, [some lenders] may securitize to remove the assets from their balance sheet, but they could lose money doing so,” he explained.
Andrew Rhodes, senior director and head of transactions at MCT, pointed to persistent inflation as “the main headwind” facing the housing market.
“Until the Fed completes its hike cycle, volatility and illiquidity in the secondary market will continue,” he said. “Once the Fed stops raising rates, one would expect the market to normalize.”
John Toohig, Head of Whole Loan Trading at Raymond Jamessaid that with rates continuing to rise, “this is going to continue to put pressure on supply.”
“There will be fewer loans issued [going forward]so there will be fewer loans that can be issued as bonds,” he added.
keep hope alive
Sean Banerjee, co-founder and CEO of ORSNNa Seattle-based fintech startup that offers lenders and private equity funds access to a cloud-based electronic full-loan trading platform with built-in quantitative analytics capabilities, considers falling mortgage loans due to rising rates as the main driver of “the declining securitization market”.
In the longer term, however, especially if we face a recession in 2023, leading to a more stable or falling rate environment, Banerjee says reduced mortgage production could create favorable pricing conditions for markets. agencies and private label securitization.
“Based on lower volumes, the market could become more efficient,” he said. “Whether [loan] issuance is slow to recover, which may be due to the credit crunch [standards]a possible recession [next year] and associated unemployment, intriguing supply-demand dynamics can occur.
Substantial secondary infrastructure has been built to accommodate the giant agency’s issuance of MBS in 2020 and 2021, and now those operations – along with whole loan trading activities – need to be adapted to the new normal.
Miki Adams, President of CBC Mortgage
He added that such a “recession scenario” could bode well for the MBS market in 2023 – even as the non-bank lender market undergoes major restructuring. This, in turn, would make the MBS market a more attractive liquidity outlet for surviving lenders.
“If there is less [quality loan] swimming pools of your choice, [sellers] are going to be able to charge a higher price than they would in the current market simply because of the lack of supply,” he explained. “This same dynamic applies to agency MBS as well as non-agency.”
Miki Adams, President of Radio-Canada Mortgagea down payment assistance provider and one of the nation’s largest non-bank second mortgage lenders, summed it up this way:
“Substantial secondary infrastructure has been built to accommodate the giant agency’s issuance of MBS in 2020 and 2021, and now those operations – along with full loan trading activities – need to be adapted to the new normal.”
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