Loan originators in our business see potential borrowers whose monthly mortgage payments would be less than their rent payments but don’t qualify for credit or income reasons. The U.S. Census Bureau published some findings on workers being hardest hit by the COVID-19 pandemic. Self-employed workers are more likely to face economic hardships in the states most affected by the virus. Other results showed that higher levels of education were less likely to lead to food shortages. And younger workers, ages 25 to 39, were more likely to report either “sometimes not having enough to eat” or “often not having enough to eat” in the past week than adults ages 55 and above. On a less serious note, there appears to be no truth to the rumor that the CDC recommends trying on your jeans every few days just to make sure they fit.
Lender Services and Products
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The secondary mortgage market marketplace can be a confusing place. It is comprised of banks, investors and financial institutions that trades mortgages, servicing rights and mortgage-backed securities, and it has a massive impact on the mortgage a borrower qualifies for and the rate they pay. After a lender extends money to the homebuyer, it could keep the loan on its books for the loan’s term, but the lender often doesn’t hold the loan, instead selling the loan into the secondary mortgage market. This enables the lender to use their limited capital efficiently, generating fees for underwriting mortgages, selling the mortgage, and then using capital again to fund a new loan.
Many loans are sold to the government-sponsored enterprises Fannie Mae and Freddie Mac or other aggregators (including mortgage originators themselves), which can earn fees from repackaging the loans as MBS that appeal to specified investor needs, or hold them on their own books and collect the interest from borrowers. Servicing rights (the right to collect the monthly principal and interest payment) may or may not be retained, which can be a lucrative stream of fees. The servicer receives a fee for processing the monthly payment, tracking the loan balance, generating tax forms, and managing escrow accounts, among other functions.
To be sold to the agencies, the loan must be “conforming”: the loan must meet certain standards set by the agencies. These factors include a maximum loan amount and debt to income ratio, and a minimum down payment percentage and credit score. The demand for conforming loans helps push down the mortgage rates for borrowers who can meet the standards.
Even amongst conforming loans, mortgages can be sliced into tranches with varying degrees of safety (the safer the bond, the lower its yield). Investors looking for a higher interest payment can buy the somewhat riskier mortgage-backed securities. Investors looking for other traits (e.g. based on risk or timing of cash flows) can find other MBS bonds to meet their specific needs. Investors have appetite for exposure to specific kinds of securities that better meet their needs and risk tolerance, and that fuels demand in the space. To put it succinctly, the secondary market exists to create more efficiency and better meet the needs of the players in the space, driving a lot of the behavior in the primary market.
How could a vaccine being made publicly available impact the housing market? The U.S. has lost over twenty-two million jobs since the start of the pandemic across various sectors impacted by restrictions and shutdowns, though housing has remained a bright spot. The strong possibility of a vaccine being made available by, or before, the spring beckons the possibility of a boom in employment, consumer spending, the economy, and likely a rise in prices. Rates move up when the economy is growing, or expected to grow, and vice versa. With the expectation of “normal” returning to the economy, upward pressure is being put on interest rates. Historically low rates have had an impact on the housing markets: despite the pandemic and tens of millions of Americans being out of work, home sales were up this year from July, August, and September 2019 by 8.7%, 10/1% and a massive 20.9%, respectively. Those low rates have enabled more buying power for home seekers, which will begin to evaporate if rates rise. That, along with increasing forbearances, delinquencies foreclosures are some upcoming headwinds for the housing market.
For months, the nature of the economic recovery, or lack thereof, has been up in the air. It was first going to be a “V” shaped recovery, then a “W” shaped one, and now it appears as if it’s going to look like a “K” or a lopsided “L.” We’re only a couple letters away from a decent game of scrabble. What is agreed is that the road to full recovery will take time for the U.S. economy to fully heal. The Covid-19 pandemic is expected to cost the economy multiple times the cost of the Great Recession, and much of the damage may be yet to come even as poverty in the U.S. has already returned to levels higher than before the pandemic.
Most U.S. economic data improved through late summer, but the rate of improvement has slowed since then, revealing an increasing divide between economic winners and losers (that “K” shape I referenced). We’ve seen pockets of weakness in retail and travel & leisure (among other) sectors, while some, like manufacturing and housing starts, have rolled on in robust fashion. Regardless, the massive number of unemployed citizens should eventually lead to a broader slowdown. Coronavirus case numbers are surging once more around the world and are forcing some businesses to shut down again.
The U.S. economy is resilient and dynamic, which means two things going forward. First, we should see a recovery in financial markets before recoveries by GDP and the labor market. We’ve already seen that equity markets have returned to pre-pandemic highs, while GDP is expected to recover by the middle of next year, while employment should return to pre-COVID-19 levels by late 2023 or early 2024. The second thing we will see is a reallocation of capital, shifting the relative share of different sectors, fostering a stronger and more dynamic economy.
No one knows precisely how these various forces will shake out, but the reallocation shifts tend to boost economy-wide productivity over the long-run, as it often means the adoption of new technologies (e.g. agriculture to manufacturing to services over the last 150 years). Fortunately, there are a lot of tailwinds for us in the mortgage sector. There is currently a buoyant U.S. housing market, benefitting from both ultra-low mortgage rates and a sudden surge in Americans looking to live in more rural and suburban areas. Additionally, fiscal policy (expanded unemployment benefits, forbearance provisions, etc.) has helped to mitigate many of the negative effects we would normally expect to see in a U.S. recession. Hopefully, that means that over the next few months, the economy will continue to chug along, albeit at a slower pace than hoped.
Of all the money spent by consumers in the United States, about 64 percent goes to spending on services. Services spending is typically resilient, even in a recession, but March and April both saw steep declines to well below the February peak. The other 36 percent of consumer spending goes toward goods purchases. More than half of that is on durable goods, the longer-lived and often bigger ticket items. Durables spending is typically where you often see the downside in consumer spending during hard economic times, though this recession has seen a lot of money being spent on things like equipping home offices and buying RVs. The rest of those goods purchases are on non-durable goods: those items with a shorter lifespan like food, disposable household items and gasoline. Non-durables have held up in this cycle as grocery store spending helped propel nondurable goods spending to a record high in March. The resurgence of the coronavirus has slowed the recovery, but once stay-at-home restrictions are lifted again, a pent-up demand for services will be a key factor in the shape of the recovery.
Looking at the bond market, it’s been a quiet start to the week, as expected, with originators working to get their year-end pools out the door and look towards 2021 production. Treasuries pulled back a bp Tuesday amid general positive sentiment and strong NY Fed support (over $13 billion between yesterday and today). The MBS basis closed tighter on the day, led by 2.5%. Supply and demand determine rates, and Tuesday’s $59 billion 7-year note auction saw a lackluster result amid the year-end lack of liquidity. The auction begins a break for the bond market on supply until the mini-Refunding in the second week of January. Economic data showed the S&P CoreLogic Case-Shiller Home Price Index increased at an annual rate of 7.9% in October, above expectations to register the largest monthly increase since April 2013 and the largest annual increase since June 2014. Contributing to the rise are record low mortgage rates along with lack of housing inventory, though yesterday obviously didn't have a profound impact on rates.
Today is the last full trading day of 2020 and it includes a light economic calendar that is already underway with advanced economic indicators for November: Goods Trade Balance (rising to $84.82 billion), Wholesale Inventories (-.1 percent), and Retail Inventories (+.7 percent). Later this morning brings December Chicago PMI and November Pending Home Sales. The Desk is scheduled to buy up to $7.1 billion, $5.5 billion of which will be in Class A. The other $1.6 billion will be in GNII 2.0% and 2.5%. These will be the last operations for 2020. We begin the last Wednesday of 2020 with both Agency MBS prices and the 10-year yield (.94 percent) unchanged from Tuesday night.
Employment and Business Opportunities
A well-capitalized mortgage organization is looking to acquire a mortgage lender with an active Fannie Mae seller/servicer, preferably located in Mid-West or East Coast. If you are interested, please email firstname.lastname@example.org. All inquiries will remain confidential.
Verus Mortgage Capital, the nation's largest issuer of securitizations backed by non-QM loans, is seeking Credit Risk Underwriting Associates. “We have multiple openings for this role including the opportunity to work remotely. This position supports all aspects of the underwriting due diligence process for a various mortgage products and property types, working with Verus management and staff to successfully purchase and prepare for securitization-viable mortgage transactions within established timeframes. The ideal candidate will possess strong underwriting, compliance, and analytical skills with the ability to address credit risk issues with both external and internal counterparts. This is an exciting opportunity to join a leading and growing company in the emerging non-QM market, that offers a fast paced and fun environment where your input and experience are valued. Click here to apply.”
Evergreen Home Loans™ is proud to be a leader in the digital mortgage space. It understands the positive impact it has on a customer’s home financing experience and continually make investments in technology. They offer a complete digital mortgage suite which includes a mobile app, a digital asset verification system, an automated CRM, and digital closings. Recently, Evergreen launched eNote as part of their Digital Closing program and in some cases, this allows for a fully remote closing. Loan officers at Evergreen can offer their customers a streamlined and transparent experience while freeing up time to act as trusted advisors. If you’re interested in working smarter and giving your customers a WOW experience, check out the Evergreen Home Loans Careers page or contact Chuck Iverson to learn about new opportunities.