We’ve written many, many times about the inexorable rise in the role of nonbanks in the mortgage market[1]. A variety of factors have contributed to these gains, including superior technology, a relatively less oppressive regulatory environment, and Covid-19 chasing people out of bank branches online.
This picture can be a little blurry, however, depending on the way you look at the market. There is, for example, the distinction between servicing book shares and origination shares. Our agency disclosure data doesn’t provide information on originators, but we can use “seller” as a proxy. The table below looks at the trends in outstanding portfolio and issuance for the conforming and Government markets over the period January 2022 – July 2023: Back in April 2022, we asked the question: The Fed’s Holdings of MBS Holdings Will Decline, Who Will Buy?[1] The release of the Q1 2023 Z.1 data[2] gives us an opportunity to begin to formulate an answer. In fact, the Fed’s share of holdings of MBS peaked at just under a quarter of the market in Q1 2022 (24.4%) and stood at just over one-fifth of the market in 2023Q1 (20.3%). Below find a table breaking this down by major purchaser. There are two sectors that declined: the Fed and Banks, and two that rose: Money markets and households. There are a few comments below: International Sector The set of international investors in MBS is a complex web of public and private sector participants in developed and emerging markets. They are motivated to invest by a broad range of considerations ranging from short-term returns to currency stabilization. A lot of ink is spilled over these issues, but there is an interesting point to be made that their positions, in aggregate, are motivated to a reasonable first degree by the returns to be found in the market. Local stories matter, of course. China remains on a long-term path of decelerating growth, bordering on deflation, weighed down by debt and a slump in the real estate sector. The Yuan is near a 15-year low, and further easing measures could lead to additional currency weakness and associated trade tensions. In Japan, the Bank of Japan recently took another step in easing its Yield Curve Control policy that would allow the 10-yr JGB rate to rise. Market concerns are mounting that an acceleration in the yield could lead to widespread adverse market consequences globally, including MBS. For all this, the share of the international sector rose by just over 1% over the last year. Banks In the previous post, we noted that the shares of bank and Fed holdings are positively correlated. This is because as the Fed sells securities, the funds used by the investors that purchase them often come out of bank deposits. That remains true, but per the table above, the decline in the bank share over the last year exceeded that of the central bank by about 2.6%: The other factor responsible for the decline in the bank share is higher interest rates which act to draw funds out of depositories into private investment vehicles. Over the past year, the formula “Change in bank share = change in Fed share – change in money market & pension share” is accurate within 1%. Private Investors Most analysts, us included, have been looking for the private sector to pick up its MBS holdings as the Fed steps back. That has in fact occurred, but with an unexpected twist. Below find the shares of holdings over time for mutual funds and households[3]: The share of MBS held in mutual funds has declined steadily since 2014, with no evidence yet that higher yields are attracting more funds into this sector. The striking result is a surge in ownership by the household sector, now accounting for over 12% of the total, the highest level attained since the GFC was raging, and the integrity of the banking sector was widely questioned. In June 2022, CPI inflation was reported at 8.9% yr/yr, the highest rate since 1981. Along with ChatGPT and the metaverse, our younger readers can learn a new term: coupon clip. It was all the rage in the early ‘80s, along with “Indiana Jones”. Wait long enough and everything comes back. [1] https://www.recursionco.com/blog/the-feds-holdings-of-mbs-will-decline-who-will-buy
[2] https://www.federalreserve.gov/releases/z1/ [3] “The households and nonprofit organizations sector is the residual holder of agency- and GSE-backed securities.”https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=LM153061705&t=L.101&suf=Q Overview
The release of the Financial Accounts of the United States (also known as the Z.1[1]) is always an opportunity to learn about important structural changes in the mortgage market. This is particularly the case in our current environment of high home prices and borrowing costs which we call “mortgage winter”. In this note, we focus on the breakdown on the ownership of risk for single family mortgages. This is not the share of ownership of MBS; it is who bears the credit risk for the loans. Unsurprisingly, the growth in single-family mortgage credit outstanding in Q1 grew by the smallest amount in almost 7 years in the first quarter of 2023: The last time we discussed the topic of appraisal waivers was at the end of 2022, when we looked at the impact of sharply higher interest rates on the use of this flexibility. Property valuation impact profitability of loan origination. Lenders can gain a significant advantage if they fully understand and choose from all the options in front of them. Given recent market developments, it is no doubt time to take another look at this topic, but structural change has come to this space, so it makes sense to discuss this first. Until last year we were in a binary appraisal/waiver world. One or zero. For some time, there have been discussions of various “modernization” programs somewhere in between, with valuations produced via a process that requires less information than that obtained from a full appraisal but not no information. To read the full article, please send an email to inquiry@recursionco.com
The value of research depends on the consumer. Traders look for actionable ideas to shore up their P/(L), policymakers look for insights into the impact of various regulatory changes, and risk managers look for potholes in the road ahead. The best research informs all of these constituencies by impacting the “big picture” thinking of all of these constituencies.
We just got a fine example of the latter from a new paper by Camelia Minoiu of the Atlanta Federal Reserve, and Andres Schneider and Min Wei of the Federal Reserve Board, “Why Does the Yield Curve Predict GDP Growth? The Role of Banks.”[1] An old puzzle in economics is why Treasury Curve yield flattening is an excellent predictor of recessions. The authors conduct a comprehensive investigation into the role of banks in the relationship. A lower term premium, they argue, reduces profitability and the availability of credit. What does this have to do with the mortgage market? Mortgage credit is provided by both banks and nonbanks. Nonbanks, it may be argued, are monoline credit providers whose credit provision is less impacted by this factor. This leads us to the following chart: Rising inflation and 30-year mortgage rates near 20-year highs of around 7%, coupled with historically high house prices, have sharply dampened housing demand in the US. This is particularly true for lower-income borrowers where household budgets are badly stretched. These developments have caught the attention of policymakers, who, in response, have taken it upon themselves to lower mortgage fees to partially compensate for these factors. This is an interesting moment in the formation of housing policy as we have two sets of changes taking effect close together in time. First, FHA announced on February 22, 2023, that it would cut its mortgage insurance premiums by 0.30% to 0.55% effective March 20. More recently, on March 22, GSEs implemented a rather complex set of changes in their upfront fee schedules, effective May 1: To read the full article, please send an email to inquiry@recursionco.com
An article published in Commercial Mortgage Alert on June 9 stated that:“Fannie Mae will no longer offer 35-year amortization schedules on loans financing market-rate multifamily properties.”
They went on to state:“Loans with 35-year amortization schedules accounted for 26.5% of Fannie multifamily loans in May, the highest portion on record and up from 6.1% in the same month a year ago, according to data from Recursion Co., which has amortization data dating to 2016. The research firm also reported that Fannie notched $4.25 billion of multifamily business in May, down 14% from last year.” The new policy takes effect on June 12. Loans with 35-year schedules providing support to affordable projects will continue to be offered. Recursion is pleased to be the preferred source for mortgage data and analytics for key information providers in the mortgage market. On June 20th, MSCI Executive Director Yihai Yu published a report “Agency MBS Are Going Social”[1], describing the data disclosed by the GSEs in the social data space. He goes on to describe how the release of this data enhances their prepayment models. We are pleased to see that they cite Recursion data in their efforts. Recursion is devoted to providing its clients with cutting-edge analytic tools to access timely and clean mortgage data at a deep level of detail conduct research of great benefit to all the participants in the mortgage market. |
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