The feast of the origins and the famine of the availability of credit

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“The Consumer Financial Protection Bureau is set to overhaul the qualified mortgage rule by proposing to move from a rule focused on debt to income to a rule based on pricing,” write Karan Kaul, Laurie Goodman and Jun Zhu of the Urban Institute. “This change will significantly expand access to credit for first-time buyers and minorities, while keeping defaults low.” Well, maybe.

Washington is a city where housing policy specialists focus on legal and regulatory changes, but they can’t actually price a loan. Of course, regulatory changes are important in the grand scheme, but their impact does not reach the magnitude of the gyrations of the financial markets. With the onset of COVID and the resulting response from the Federal Reserve and other agencies, market pressures have dramatically reduced the availability of credit.

National Mortgage News solicited the views of the C-suites of the major non-bank mortgage issuers, the companies that make and consolidate most loans in the United States today. “There are definitely a few themes in the market given the constraints of operational capacity relative to demand and the credit environment in general,” said one of the top five capital markets traders.

Even as mortgage loan issuance increases and secondary loan market profits reach decade highs, the industry is under considerable pressure. Mortgage originators lack adequate financing and therefore seek to maximize the return on income with less complicated loans. This means a more streamlined refi, more agencies and governments, fewer independent borrowers. And no no-QM thank you very much.

Credit margins remain high due to origination capacity constraints, both operationally and in terms of warehouse and gestation financing capacity. While the big banks pulled back from purchasing third-party production after March, reversing a promising trend, they largely maintained trade finance for lenders and service providers.

But as the new issue market has seen volumes increase at high double-digit percentages over the past six months, the volume of bank financing has not kept pace.

Smaller banks and dealers are filling part of the gap, but the lack of flexibility in bank financing is becoming a serious constraint for some companies in terms of lending to low-income borrowers.

The SIFMA chart illustrates the massive increase in new issuance of mortgage-backed securities.

Given that primary-secondary market spreads are still around 65 basis points above normal and volumes are increasing, there is no reason for lenders to look to lower credit as given the interest rate environment. The bottom third of the agency and state loan market is mostly selected, in part due to active market manipulation by the Fed. This is an unintended consequence of the Fed’s open market operations, namely a flight to the quality of mortgage lenders.

“Like all credit cycles,” notes another top five operator, “as the industry’s operational capacity catches up with demand, margins will tighten and originators will begin to focus on weaker credit opportunities.” . He adds: “I don’t have the impression that this is coming soon ….”

“When interest rates fall, credit tightens because when capacity is limited and a business can make any loan, as in any oversupply environment, you spend the least to make it. more, “the CEO of a major government lender told National Mortgage News. “That’s the fruit theory at your fingertips. You work harder and take more risks as you get harder in volume.”

Indeed, what we are seeing today in mortgage markets in terms of access to mortgage financing is the supply and demand for work credit. Liquidity also behaves this way. If there is more demand for the liquidity you provide, the price increases until the demand weakens. The same is true of credit metrics, which work the same way as liquidity. Better loans get better execution in the secondary market.

You can see the market rule at work, both for loans and financing. In March, as secondary markets nearly froze, the first products to disappear were non-QM loans and prime jumbos. TBA-eligible consumer products in agency and government lending markets were hardly affected, especially when the Fed began buying two-handed MBS as it resumed “quantitative easing “or the QE.

A former New York Fed official told National Mortgage News: “Ten years ago, we bought $ 1 trillion in MBS in one year. In 2020, we did it in weeks.” And the Fed continues to buy a significant chunk of total market issuance, even as loan volumes skyrocket.

Less liquid and specialized products like variable rate mortgages and specified pools of agency and state loans have essentially gone off trading for months. The co-issuance market has stopped. And the build-up of forbearance loans due to COVID has created a financial burden for the industry whose resolution remains to be defined.

Another market undercurrent that affects access to credit relates to the issue of loan repurchase applications and private mortgage insurance in the conventional market. Age-old concern that a COVID-related forgone loan could eventually lead Fannie Mae or Freddie Mac to request a buyout (after private mortgage insurers refused to pay) makes lenders very reluctant to take risks on something other than a flawless borrower.

And perhaps the biggest deterrent for lenders to maintain access to credit is the uncertain outlook for the economy and jobs in the United States. Unemployment rates, while improving somewhat, remain very high. For many lenders this means less public loans in general and higher FICOs for public loans. Again, why take a credit risk when volumes are increasing and capacity is limited?

Sad to say, while conventional and government loans have experienced an unprecedented boom since the early 2000s, the jumbo and non-QM markets are not a priority for most lenders given the amount of lending in the world. agency relatively easy to deal with.

“We have very liquid markets for agency and government securities,” notes the capital markets trader. “There are large payments in the specified pool market for slow-paying paper. TBA remains very liquid, with the Fed buying half of the origination volume each day.”

The good news is that lenders are starting to feel some interest in whole loans again, as the private label market returns from a credit spread perspective, but the threat of discounts due to forbearance remains a concern. persistent in conventional loans.

Significantly, the jumbo prime market that is part of the $ 3 trillion banking book remains illiquid and dysfunctional. For policymakers concerned with access to credit, they can take comfort in the fact that while many low-income households cannot obtain credit to buy a home, many wealthy Americans today also face a market. illiquid for residential mortgages.

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