With the onset of the Covid-19 crisis, the role of the banking sector has once again risen to the forefront of concern. As noted in an earlier post, the sharp spike in unemployment is certain to lead to a surge in delinquencies. Banks play a significant role in the mortgage pipeline as originator, servicer and investor. In our previous post, we noted that the onset of the crisis has triggered a flood of cash flowing into bank deposits as households and others shed risky assets. As such, banks have more assets to invest, including in the mortgage market.
Banks like mortgages as an investment, spurred by solid fundamentals related to firm labor markets and rising, but not overly stretched home prices. Banks are protected from credit and default risk by owning agency MBS instead of mortgage whole loans and enjoy favorable treatment from the capital rules set by the regulators. According to Federal Reserve data, in Q4 2019 banks held about 25% of the $9.6 trillion agency MBS market. To understand the behavior of banks in this market it is important to probe its underlying structure.
With the onset of the Covid-19 crisis, the role of the banking sector has once again risen to the forefront of concern. As noted in an earlier post the sharp spike in unemployment is certain to lead to a surge in delinquencies. Substantial purchases by the Federal Reserve of Mortgage Backed Securities (MBS) have had a limited impact on rates facing borrowers due in part to uncertainty around the magnitude of the losses and who will bear the costs. Policies regarding forbearance and liquidity provision to mortgage servicers are having an impact on lending standards and the availability of credit.
Banks play a significant role in the mortgage pipeline as originator, servicer and investor. Most of the current focus is on the first two, but the importance of their role as investor is also crucial. According to Home Mortgage Disclosure Act (HMDA) data Recursion uploaded to the cloud, 3.1 million individual single family loans with a balance of $739.4 billion were originated in 2018 by the banks, of which 60.4% were held on their balance sheet. Each loan file in the data set contains many characteristics, including originator information. As banks originated about 43% of all mortgages that year, the implication is that about one quarter or all residential mortgage production was kept by the banks.
On April 7, 2020 our CEO Li Chang was invited to speak as an industry expert at a graduate-level finance class at the Gabelli School of Business at Fordham University. Students were also given free access to the Recursion Analyzers to help them monitor the current mortgage market trend using big data tools.
Students were introduced to the problem of understanding the role of new mortgage fintech lending based on the use of loan-level data on U.S. mortgage applications and originations reported to their regulators according to the Home Mortgage Disclosure Act (HMDA).
In February 2019, BB&T announced its acquisition of SunTrust Bank for about $28 billion in stock. In December that year, the nation’s 6th biggest bank, Truist, was created. There are, of course, a multitude of reasons why financial institutions merge. A classic explanation is that they wish to obtain economies of scale by combining overlapping operations in particular markets. As regional commercial banks with a heavy consumer focus, both these institutions faced earnings pressure from developing headwinds in the mortgage market as interest rates climbed in 2018. (Table 1).