How one MBS investor thinks supply and demand will get back in sync
March 20, 2023 10:40 AM
Photographer: Patrick T. Fallon/Bloomberg
The shrinking supply of affordable homes sought by a growing number of households has been further complicated by federal officials' renewed interest in boosting rates and secondary-market volatility.
This has made things tougher for the mortgage and housing industries, which havehad to get creative to provide emerging would-be homeowners with affordable financing homes since officials began raising rates to fend off inflationary pressures , creating multiple challenges for the market. These include, most recently, Silicon Valley Bank's collapse, which was partly related to how it failed to adjust its mortgage-backed securities investments for the impact of rate hikes.
Dynex Capital CEO Byron Boston, an industry veteran, has seen a lot of market gyrations over time and has some thoughts on how all this might ultimately be resolved. It won't be an easy process for the industry as it'll involve going through the housing correction that federal monetary policy officials have said they're looking for in their fight against inflation. But it could eventually return put the balance of supply and demand in the market back on more of an even keel.
Boston has been working with publicly traded companies since the early 2000s, and is wary of current risks to the housing finance and banking systems, but confident in his ability to navigate them knowledgeably.
In his latest interview with this publication, Boston shared his views on some of complexities involved in the current balance of supply and demand in housing, mortgage and securitizations markets
The following are excerpts from an interview with Boston, edited for clarity and length.
This has made things tougher for the mortgage and housing industries, which have
Dynex Capital CEO Byron Boston, an industry veteran, has seen a lot of market gyrations over time and has some thoughts on how all this might ultimately be resolved. It won't be an easy process for the industry as it'll involve going through the housing correction that federal monetary policy officials have said they're looking for in their fight against inflation. But it could eventually return put the balance of supply and demand in the market back on more of an even keel.
Boston has been working with publicly traded companies since the early 2000s, and is wary of current risks to the housing finance and banking systems, but confident in his ability to navigate them knowledgeably.
In his latest interview with this publication, Boston shared his views on some of complexities involved in the current balance of supply and demand in housing, mortgage and securitizations markets
The following are excerpts from an interview with Boston, edited for clarity and length.
What is your takeaway on the SVB situation from the perspective of the mortgage-backed securities market?
The U.S. RMBS market is one of the world's largest and most liquid of all fixed-income markets, second only to the U.S. Treasury market. It continues to operate normally and efficiently, despite the recent volatility in the banking sector. Nearly two-thirds of total home mortgage debt in the U.S. has been securitized into MBS, with residential mREITs playing an important role in facilitating the housing market by investing in these mortgage-backed securities. I think it's always important to maintain a flexible mindset and evaluate all scenarios, especially in this current macroeconomic environment.
I know your company is more of an investor, but what do you think the lending and servicing outlook is like?
We saw an investment banker earlier and he said a lot of these companies are trying to merge.
There was an explosion in mortgage employment in 2020, when rates dropped, and it was a massive refi wave in the sector. It's just painful now as they are retrenching.
Interest rates are what's going to be the largest input here as far as what happens in mortgages.
The same thing happened today that happened in 1994 and '95. I'm trying to think of other real tightening cycles where the same thing happens. It's painful. The cost of mortgages goes up, the cost of owning a home goes up, housing demand and refinancing goes away.
I've been through multiple refi waves throughout my career. It was really amazing to see we'd refinanced all the way down to 2% mortgages from 18%. That's been an unbelievable run for the mortgage banking industry, but it gets a little more creative when you start trying to get people to refinance out of a two-point-something percent mortgage.
There was an explosion in mortgage employment in 2020, when rates dropped, and it was a massive refi wave in the sector. It's just painful now as they are retrenching.
Interest rates are what's going to be the largest input here as far as what happens in mortgages.
The same thing happened today that happened in 1994 and '95. I'm trying to think of other real tightening cycles where the same thing happens. It's painful. The cost of mortgages goes up, the cost of owning a home goes up, housing demand and refinancing goes away.
I've been through multiple refi waves throughout my career. It was really amazing to see we'd refinanced all the way down to 2% mortgages from 18%. That's been an unbelievable run for the mortgage banking industry, but it gets a little more creative when you start trying to get people to refinance out of a two-point-something percent mortgage.
Will this affect MBS supply?
The Fed is trying to take care of that problem.
So the Fed letting mortgage-backed securities in its portfolio roll off, or possibly even moving to shrink those holdings, more than balances out the contraction in originations with a reduction in demand?
It does help, and if rates do turn and drop even some amount where more recent coupons have refi incentive, more supply could be created.
There's been a lot of forecasting around inflation and what that could mean for rates. We don't have an opinion on that and don't try to predict the future. We do like to prepare for multiple different scenarios in the future.
This has been going on since I've been in the business. Rates go up, refinances drop and you enter into a much bigger slowdown in the mortgage cycle. Tons of layoffs happen, some companies go out of business and others sell themselves.
The global volatility we have had is absolutely unusual, though. This is not normal for this generation of investment professionals. This is, this is extreme volatility. You have to prepare to react to that, and the better you prepare, the more calm you'll be in reacting.
As you actually get new information, the probability that it's surprising information is relatively high, and at that point, you have to make investment decisions. The better prepared you are for that uncertainty, the more likely you make the right investment decision.
There's been a lot of forecasting around inflation and what that could mean for rates. We don't have an opinion on that and don't try to predict the future. We do like to prepare for multiple different scenarios in the future.
This has been going on since I've been in the business. Rates go up, refinances drop and you enter into a much bigger slowdown in the mortgage cycle. Tons of layoffs happen, some companies go out of business and others sell themselves.
The global volatility we have had is absolutely unusual, though. This is not normal for this generation of investment professionals. This is, this is extreme volatility. You have to prepare to react to that, and the better you prepare, the more calm you'll be in reacting.
As you actually get new information, the probability that it's surprising information is relatively high, and at that point, you have to make investment decisions. The better prepared you are for that uncertainty, the more likely you make the right investment decision.
How can the mortgage industry reach the next generation of homebuyers given these market conditions?
That's hard unless they've got a parent who has a lot of money to help buy down the cost of the house. Those young people who have parents who can help them with the cost of the home can potentially still buy a home, but a lot of people are moving to the sidelines. All you can do as a lender is try to reach those parents.
There is a wealth inequality issue here. Young people who are born into families where their parents can help them are much better off in terms of buying a home. If you really look closely, you'll probably find that a lot of young couples in nice homes have parents who helped them.
There is a wealth inequality issue here. Young people who are born into families where their parents can help them are much better off in terms of buying a home. If you really look closely, you'll probably find that a lot of young couples in nice homes have parents who helped them.
Is there much hope public policy aimed at addressing inequities will succeed?
The income and wealth inequality has been growing for decades now, since the 1980s. The last decade has only exacerbated the situation. The rents also are hurting people. Apparently rent growth has been slowing a little bit, but it's already gone up so much over the last decade that it's really the renter population.
Does this lead to consolidation in household formation?
Until costs come back down, otherwise that's right. Renters are taking in roommates or moving back in with parents because the cost of renting has just gotten too prohibitive.
Does mortgage underwriting that allows for group ownership of homes help?
That's not going to stop the inflation that's happened in housing prices. The inflation that's happened in rent at the end of the day also is squeezing a huge amount of the American population. Prices are going to have to come down to where they are affordable.
