The Severity of Mortgage Winter
In recent posts, we introduced the phrase “Mortgage Winter” to describe the current environment where high-interest rates and elevated home prices lead to a severe drop in transaction volumes. Subsequently, we looked at the impact of this situation on individual market participants. The bulk of market participants across the mortgage ecosystem is experiencing year/year revenue declines of two-thirds or more. These entities are having to adjust their business models to this situation and develop strategies to navigate the uncertain environment ahead.
Spring will come, but whether the ensuing rebound will be sufficient to return the sector to a state of financial health is a question that remains far from assured. There is also another factor to consider besides revenue, and that is the potential for increased servicing costs associated with delinquent borrowers.
It is well known that since June 1, 2022, the Federal Reserve has allowed MBS to mature off its balance sheet without replacement. Consequently, the portfolio has declined, but at a very modest pace since high-interest rates have eliminated most of refinance activities: