Where is mortgage money going to come from?

David Goldsmith

All Powerful Moderator
Staff member

Private-label MBS market facing strong headwinds​

Rate volatility and Fed policy proving to be a drag on nonagency mortgage-backed securities issuance

The pace of mortgage-backed securities (MBS) issuance in the nonagency market slowed considerably in July and August as rising interest rates and Federal Reserve MBS-purchase policy have combined to dampen the momentum exhibited in the private-label space in 2021 and over the first half of this year.
In July and August of this year, there was a total of 25 residential mortgage-backed securities (RMBS) deals secured by mortgage pools valued at $8.3 billion, according to nonagency RMBS offerings, both prime and nonprime, tracked by the Kroll Bond Rating Agency (KBRA). That’s less than half the volume of private-label securitizations tracked by KBRA over the same two-month period in 2021, when there was a total of 44 RMBS transactions backed by loan pools valued at $19.4 billion.
The nonagency share of the MBS market just prior to the housing market crash some 15 years ago exceeded 50% — with the balance being MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae, or agency issuance. By 2012, in the wake of the global financial crisis, private-label MBS market share had shrunk to 1.83%.

The nonagency share of the market has been rising slowly since then, reaching 4.32% in 2021, according to recent analysis by the Urban Institute’s Housing Finance Policy Center. Last year “was the largest year of nonagency securitization since 2008,” the Urban Institute’s report continues.
That trend accelerated over the first half of this year, with the nonagency share reaching 6.52%. The frenetic pace of growth in nonagency issuance has since slowed, however, due to a variety of market pressures — chief among them the contraction of mortgage originations in the face of fast-rising interest rates.
“In August 2021, the 30-year fixed-rate mortgage rate stood at approximately 2.75%,” a recent KBRA report on the nonagency RMBS market states. “Less than one year later, in June 2022, the rate reached 5.8% ….
“In late July 2022, mortgage application rates had fallen for the fourth consecutive week, pushing the MBS mortgage application to its lowest level since February 2000.”
Despite these headwinds, year to date through August of this year, overall issuance volume in the nonagency MBS space is still up slightly over the same period in 2021.
KBRA’s data, based on the deals it tracks, shows a total of 141 RMBS offerings came to market through August of this year backed by mortgage pools valued at $63.1 billion. That compares to 135 RMBS offerings backed by loans valued at $57.1 billion over the same period in 2021.
Declining mortgage originations in the face of rising rates is not the only impediment to nonagency MBS issuance going forward, however. The Federal Reserve’s pullback from the MBS-purchase market — as it pursues a policy of quantitative tightening to fight inflation — also is creating pricing pressures for MBS issuers, compounding pressures sparked by volatile rates.
The [Federal Open Market Committee] intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested …,” the Board of Governors of the Federal Reserve said in a recent statement explaining its policy.
The Fed capped monthly MBS runoff of its $2.7 trillion MBS portfolio over the past three months at $17.5 billion. That cap doubled starting in September, meaning the central bank going forward will now allow up to $35 billion per month in MBS to roll off its balance sheet as the securities mature.
“The additional MBS supply the central bank will allow to roll off from its portfolio and hit the market this month [September] is estimated between $20 and $25 billion,” states an analysis by financial advisory firm Mortgage Capital Trading. “This [rate of runoff] will necessitate private investors to absorb about $250 billion in additional supply per year over the next decade.
“Mortgage spreads widened toward the end of August [an indicator of an increased perception of risk] as a result of investors beginning to take the Fed seriously. Should the Fed decide to speed up the process and begin to actively sell mortgages off its balance sheet (again, not likely), it will be the [MBS] production coupons from the past few years that will bear the brunt of it.”
The Fed’s pullback from the MBS market and the additional MBS supply now available for sale, primarily agency MBS, creates pricing pressures for MBS issuers generally. In addition, in a rising rate environment such as the one we are experiencing, MBS pricing is subject to something known as “negative convexity” — which is the tendency for MBS prices to decrease at an increasing rate as interest rates rise.
The 30-year fixed mortgage rate averaged 5.89% this week, up from 5.66% the prior week, according to the most recent Freddie Mac Primary Mortgage Market Survey (PMMS).
“Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation,” said Freddie Mac Chief Economist Sam Khater, reacting to the release of this week’s PMMS survey results.
Interest rate stability offers the best environment for MBS performance. That stability, so far this year, has been elusive.
KBRA’s RMBS report notes that hard times in the mortgage industry, such as the existing environment, will require mortgage originators to adapt or face the prospect of failure.
“Industry headlines have trumpeted layoffs at large bank originators like JPMorgan Chase, Flagstar, and Wells Fargo, as well as many more nonbanks,” the KBRA report states. “Some companies have shut down entirely, such as Sprout Mortgage, or filed for bankruptcy protection, as is the case for First Guaranty Mortgage Corporation.
“As has been the case over the past 30 years, lenders will continue to fail for various reasons, particularly in challenging economic environments and when they are dependent on external funding.”
Still, unlike the lax underwriting environment that accompanied the housing-industry crash earlier in the century, KBRA said the mortgages that are being originated today are vastly superior in credit quality overall, which bodes well long-term for the health of the mortgage-securitization market as well — once some market stability is achieved and investor confidence is bolstered.
“Originators’ legal and reputational liabilities have increased, as have pre-securitization loan-quality verification procedures,” the KBRA report stresses. “In KBRA’s view, while lender failures will continue, the RMBS market has many features that reduce the correlation between lender failure and future loan performance.”

David Goldsmith

All Powerful Moderator
Staff member
Homeowners switching to more risky home equity loans as mortgage rates rise.

CalculatedRisk Newsletter

Mortgage Equity Withdrawal Still Strong in Q2​

Homeowners now relying on Home Equity lines to extract equity​

CalculatedRisk by Bill McBride
Sep 12

Refinance activity declined sharply this year as mortgage rates increased, and I was expecting MEW to also decline in Q2 as fewer homeowners used cash-out refinancing. However, homeowners have switched to using home equity loans (2nd loans) to extract equity from their homes. From Black Knight:
While withdrawals via cash-out refinances fell by 30% from Q1, preliminary data from the Black Knight home equity database suggests home equity lending was up nearly 30% quarter over quarter, the largest volume in nearly 12 years

Quarterly Increase in Mortgage Debt

Here is the quarterly increase in mortgage debt from the Federal Reserve’s Financial Accounts of the United States - Z.1 (sometimes called the Flow of Funds report) released on Friday. In the mid ‘00s, there was a large increase in mortgage debt associated with the housing bubble.

In Q2 2022, mortgage debt increased $263 billion, the most since 2006. Note the almost 7 years of declining mortgage debt as distressed sales (foreclosures and short sales) wiped out a significant amount of debt.

However, some of this debt is being used to increase the housing stock (purchase new homes), so this isn’t all Mortgage Equity Withdrawal (MEW).

Mortgage Debt as a Percent of GDP

The second graph shows household real estate assets and mortgage debt as a percent of GDP. Note this graph was impacted by the sharp decline in Q2 2020 GDP.

Mortgage debt is up $1.46 trillion from the peak during the housing bubble, but, as a percent of GDP is at 48.9% - up slightly from Q1 - and down from a peak of 73.3% of GDP during the housing bust. This means most homeowners have large equity cushions in their home, and some MEW is not a concern.

Calculated Risk Estimate of MEW

The following data is calculated from the Fed's Flow of Funds data and the BEA supplemental data on single family structure investment. This is an aggregate number and is a combination of homeowners extracting equity - hence the name "MEW" - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

For Q2 2022, the Net Equity Extraction was $169 billion, or 3.65% of Disposable Personal Income (DPI). The last year has shown a sharp increase in equity extraction compared to recent years, but the level is nothing like the amount of equity extraction during the housing bubble as a percent of DPI. During the housing bubble we saw several quarters with MEW above 8% of DPI.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method. MEW was negative for a number of years but has picked up again following the onset of the pandemic.

The bottom line is, despite the recent increase in MEW, it is far less as a percent of disposable personal income than during the bubble, and most homeowners have substantial equity. However, the “Home ATM” is still open with homeowners now relying on Home Equity lines to extract equity.

David Goldsmith

All Powerful Moderator
Staff member

Rates Jump a Quarter Point Instantly After Key Inflation Report; Now Back to 14-Year Highs​

Rates Jump a Quarter Point Instantly After Key Inflation Report; Now Back to 14-Year Highs

Mortgage rates were already in the vicinity of the highest levels in 14 years. With large day-to-day swings being extremely common these days, we were only ever one bad day away from making it back to those highs. Today was one of those days!
The culprit was at least well known and well understood, both before and after it had its impact on rates. This morning brought the scheduled release of August's Consumer Price Index (CPI), a key inflation report that has proven to have more power than any other inflation metric when it comes to creating volatility in rates.
In other words, we already knew that rates would be headed higher if today's inflation data came out higher than expected, and that's exactly what happened. In fact, the actual number beat forecasts by much more than the normal gap between reality and forecasts. It's common to see a deviation of 0.1-0.2%, but today's was 0.3%.
Bonds dislike inflation for a variety of reasons. There are broad, practical reasons involving the impact inflation has on bondholders' returns, but there are also timely, tactical reasons. The latter is a reference to next week's Fed announcement. The Fed's job is to fight inflation and one of the ways it does that is to hike its policy rate.
See Rates from Lenders in Your Area
The Fed Funds Rate isn't the same as a mortgage rate, but higher Fed Funds Rate expectations tend to push mortgage rates higher. Bottom line: markets now expect the Fed to discuss an even bigger rate hike next week and the bond market is pricing in that possibility today.
The average mortgage lender is back up into the lower 6's for conventional 30yr fixed loans. Quotes vary widely depending on the scenario and the presence of upfront costs and discount points. It continues to be the case that many loans require more upfront cost than is historically normal due to the current landscape of mortgage bond pricing.

© 2022 - Mortgage News Daily

David Goldsmith

All Powerful Moderator
Staff member

The Fed Stopped Buying MBS Today.​

The purpose of MBS purchases was to repress mortgage rates and inflate home prices. That process has already started to reverse.

A date for history: Today, September 15, the Fed stopped buying mortgage-backed securities altogether. It had been tapering its purchases since late last year. Since June, when the phase-in of QT started, it still purchased MBS to replace some of the pass-through principal payments from mortgage payoffs and mortgage payments that reduced the balance of its MBS faster than the cap of $17.5 billion. The idea was to keep the run-off of MBS within the cap of $17.5 billion in June, July, and August. But this circus is finally over.
On today’s release of scheduled purchases, which is published every two weeks on Thursday by the New York Fed, there were zero MBS purchases scheduled:

The Fed’s final trade in MBS.​

Yesterday, September 14, the Fed conducted its final purchase of MBS. The Fed bought $387 million in MBS in the To Be Announced (TBA) market, which is a minuscule amount by the Fed’s standards. It went out with a whimper, so to speak.

This is a screenshot of the trade that the New York Fed posted on its website. I underlined the operation date (Sep 14) and the settlement date (Oct 20):

Trades in the TBA market settle after one to three months. As you can see in the image of the trade info above, this particular trade will settle on October 20.
The Fed books these trades when they settle. So, it will book this trade on October 20, which is a Thursday. Its weekly balance sheets are always as of Wednesday evening, and are published on Thursday. This trade will show up on the next balance sheet after October 20, which is the balance sheet to be released on October 27.
So halleluiah, the balance sheet on October 27 will show the final purchases of MBS. And then it’s over.

A trickle of trades haven’t settled yet.​

The MBS that were purchased over the past two months will still trickle into the weekly balance sheet until October 27.
This includes a batch of MBS trades that the Fed conducted on July 25 and that settled on September 14, and that showed up on today’s balance sheet. Here is one of the trades that settled yesterday and was included today:

In total, $9.2 billion in MBS trades showed up on the balance sheet today. It is these trades, when they settle, that cause the balance of MBS to rise in the jagged manner.
MBS come off the balance sheet mostly through pass-through principal payments. When the underlying mortgages are paid off because a home is sold or a mortgage is refinanced, or when regular mortgage payments are made, the principal portion is forwarded by the mortgage servicer (such as your bank) to the entity that securitized the mortgage (such as Fannie Mae), which then forwards those principal payments to the holders of the MBS (such as the Fed).
The book value of the MBS shrinks with each pass-through principal payment. This reduces the amount of MBS on the Fed’s balance sheet.
These pass-through principal payments are uneven and unpredictable, and do not match the purchases in the TBA market. So the MBS balances form this jagged line of increases when TBA purchases settle, and the decreases when the pass-through-principal payments come off.
The upticks are the purchases from one to three months ago, when the Fed was still phasing in QT and was still purchasing MBS to replace pass-through principal payments. The downticks are the pass-through principal payments. Sometimes both coincide, and the net moves are smaller:

The last time the Fed did QT Nov 2017 – Feb 2020.

During the last episode of QT, the Fed shed MBS from November 2017 through February 2020. The chart below shows this phase of the MBS reduction. During the phase-in, it took about three months before the first declines became recognizable. QT back then was much slower, and the phase in was much longer, than in the current era of QT.
Note how the upticks essentially vanished as the Fed bought fewer or no MBS to maintain the cap of the runoff, and the line smoothened out on the way down:

Going to zero?

Going forward, after October 27, 2022, after the last MBS purchases have shown up, the upticks will disappear, and the line will smoothen as it heads down. But this time, the decline will be steeper and faster.
The Fed has said many times over the years that it wants to get rid of its MBS entirely, and that it wants only Treasury securities as assets. So if everything goes according to plan, the MBS balances will go to zero. And this might require that the Fed starts selling MBS outright later in the process to supplement the pass-through principal payments. The Fed has already put this option on the table.
The entire episode of MBS on the Fed’s balance sheet started in late 2008, when the Fed for the first time started buying MBS as part of QE-1. By the peak in April, 2022, the Fed had $2.74 trillion in MBS on its balance sheet.
The purpose of MBS purchases was to repress mortgage rates and inflate home prices. That process has already started to reverse.

David Goldsmith

All Powerful Moderator
Staff member
‘Some companies are closing their doors, others are shutting down divisions’: Rocket CEO outlines plans to navigate the dramatic decline in mortgages

Rocket, which owns Rocket Mortgage, Rocket Money and more, is planning to diversify its approach to reach more consumers in the face of weak demand.

The mortgage industry is struggling with higher rates and a sharp drop in buyer demand. Rocket RKT says it’s got a plan to turn things around.

There’s turmoil in the sector. Volume of originations and refinances has plunged. The Market Composite Index, a measure of mortgage application volume, fell to 255 in the week ending Sept. 9. A year ago, the index stood at 707.9.

Buyers — and sellers too — are hesitant. And that’s pushed lenders to take steep cuts.

“The way this business works is that sometimes, too much capacity is put into the system, and that’s exactly what happened in 2020 and 2021,” Jay Farner, CEO of Rocket Companies, a Detroit-based group that is one of the nation’s largest mortgage lenders, told MarketWatch.

“It can be painful … some companies are closing their doors, others are shutting down divisions of their companies. Others are doing layoffs,” Farner added. “Unfortunately, that’s part of the process — that capacity comes out.”

But Rocket is trying to hold steady amid the storm. It’s pushing deeper into its recent acquisition of a personal-finance app; it’s competing hard among its peers to win over customers; it’s trying to improve efficiency.

“All of those things will give us the opportunity to increase conversion and grow market share,” Farner said.

Rocket, which owns companies like Rocket Mortgage, Rocket Money, Rocket Solar, and more, went public during the pandemic in early August 2020 on the New York Stock Exchange. It raised $1.8 billion, offering $18 a share to interested investors. (It even became a meme stock at one point.)

But after two years of stellar performance, alongside the rest of the sector, the company is recuperating from damages sustained from a storm caused by higher rates and falling buyer demand. The stock was trading below $8 a share on Monday.

Rates are up from 3.16% this time last year, to 6.02% in mid-September, according to a weekly survey by Freddie Mac. The massive drop in sales and the sector more broadly has led to some experts calling it a “housing recession.”

Many lenders are laying off staff, from banks like Citi C to JPMorgan Chase JPM
and startups like Better. Some smaller outfits have even shut down fully, like Reali, a real-estate tech startup, and Sprout Mortgage. Plano-based First Guaranty Mortgage Corp filed for Chapter 11 bankruptcy.

Rocket and its non-bank peers have a sizable share of the market, at about two-thirds of mortgages, Inside Mortgage Finance said.

Unlike traditional banks, customers can’t open checking or savings accounts at a non-bank lender. And unlike banks that fund loans with their own customers’ deposits, non-banks borrow money from capital markets to offer mortgages to borrowers.

When rates went back up to 2008 levels, these non-bank lenders were stuck. Mortgage demand is down by nearly 30% from the same time last year.

“The monthly mortgage payment has increased about 60% compared to a year ago,” Nadia Evangelou, senior economist and director of forecasting at the NAR, said in a statement.

For the buyer, affordability has seriously worsened. Back in April 2021 when rates were at 3%, the annual income needed to buy a home at median price at $340,700 was $79,600, researchers at the Harvard Joint Center for Housing Studies said on Friday.

In July 2022, with a rate of 5.41%, and that median price rising to $403,800, the annual income needed for someone to afford a home would be $115,000.

The massive drop in sales and the sector more broadly has led to some experts calling it a ‘housing recession.’

Consequently, buyers are fleeing the market. And Rocket hasn’t been spared: In April and August, the company trimmed its workforce in response to the drop in business.

In the second quarter, the company reported total revenue of $1.4 billion, down from $2.7 billion in the first quarter. Net income was $60 million in the second quarter, down from $1 billion in the first quarter.

For Rocket RKT , the heat is on grab a bigger piece of the pie, Farner said.

“You got a market that was about $4 trillion in mortgages. And now you’re gonna have a market that’s going to be $2 trillion or so, give or take,” he said.

It may have shrunk, but “that’s still a huge market,” Farner added. And he’s looking to increase market share.

Rocket’s market share is about 6.4% currently, Inside Mortgage Finance said, which is the largest among all banks and non-banks, as of the first quarter of this year.

“2020, 2021 were the highest volume years ever,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch. “During the pandemic, lenders really struggled to hire to fill their openings … we were hearing about seven figure sign-on bonuses for high producing officers.”

In April and August, Rocket trimmed its workforce in response to the drop in mortgage business.

A mortgage advisory firm, Stratmor Group, said one lender referred to them as “monster signing bonuses.”

But after rates went up and business dried up, capacity needed to be reduced “to right-size the whole industry,” Fratantoni added.

With the Federal Reserve set to hike rates further, which is likely to push mortgage rates even higher and pressure the business, mortgage companies have been embarking on efforts to be more competitive and entice buyers.

Last Friday, Rocket announced its ‘Inflation Buster’ program, which offers to shave off one percentage point off a buyer’s mortgage for the first year of their loan.

In other words, if a buyer takes out a 6% mortgage, Rocket is offering 5% for a year. That saves a buyer who’s taking out a 30-year mortgage at 5.75% for a $400,000 home nearly $3,000 in that first year.

It also took over mortgage originations from Santander Bank SAN , as the company exited the U.S. mortgage market. Rocket recently spent $1.3 billion on. the acquisition of Truebill, a personal-finance app.

The acquisition of Truebill, now rebranded as Rocket Money, is another move to try to deepen its connection with customers, the CEO said, and offer more targeted products, without excessive paperwork.

Rocket Money has access to consumers’ credit information, with their permission, which makes monitoring financial health a lot easier, he said. “Updating the data will allow us to get to a place where we can have them mortgage ready at any moment in time,” Farner said.

There will be stiff competition for those who do wish to take out a mortgage, experts say. And there are still a lot of cuts to come, based on Fratantoni’s estimations. Now that refinancing has dropped off, with rates more than double what they were a year ago, margins are shrinking for lenders, he said.

Expect employment in the mortgage industry to drop by 20% to 30%, Frantantoni added. As of the second quarter, lenders had only trimmed 2% to 10% of their workforce.

Others say the drop in activity was something of a wake up call for the industry. “The economy hasn’t fallen apart,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch. “It’s just that the mortgage business was too big.”