2021 predictions for the secondary market, mortgage servicing rights

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When the secondary market shut down during the pandemic this year, lenders primarily worried about two things: whether borrowers could still pay and whether they’d have enough places to sell loans to.

They’re hoping for better in 2021, while not forgetting lessons learned about the market’s risks in 2020.

“I want as many arrows in my quiver as possible,” said Brian Gilpin, senior vice president, treasurer and head of capital markets at Embrace Home Loans.

“We’re just trying to keep all of our options available come 2021 because you just don’t know where things are going to go, and we saw this year things can go pretty far in one direction pretty fast,” he said. “When that happens, you just have got to adapt.”

For Gilpin, that means staying in touch with all the possible outlets to sell to, which he thinks he will be able to do through traditional networking. However, other players may turn to secondary market trading platforms, he noted.

When the pandemic hit, Gilpin, like many lenders, saw those secondary buyer options quickly whittled down primarily to the government-related outlets and he adjusted accordingly. But the market recovery seen in fits and starts in the past year have made him hopeful that he may be selling to more buyers next year.

“We haven’t sold much into the secondary market that went to investors besides Fannie Mae, Freddie Mae and Ginnie Mae this year, but we do work to maintain those relationships so come January, we could be ready to go,” he said.

“From my talks with account executives at the larger aggregators, I sense folks have been coming back,” Gilpin added. “I would expect we could start to see more people selling to aggregators some of that flow that’s been going directly to the agencies.”

Booming originations from rate stimulus coupled with the redirection of sales have caused the conduits the agencies use to buy loans to swell. Fannie Mae, for example, reported 150% year-over-year growth in its whole loan conduit that absorbs sales from small and midsized lenders during the third quarter.

There’s a lot of uncertainty around public policy and the pandemic that will determine to what extent government-related agencies will compete with investors in the private market for loans next year.

Among the many possible reforms contemplated for Fannie and Freddie by policymakers — who collectively have had mixed feelings about the extent of government involvement in the mortgages — are price adjustments and proposals that would decrease the GSEs’ involvement in certain types of loan purchases.

“One of the studies that they’re evaluating at the GSEs is whether it is really part of their mission to support second homes and investment properties,” said Tim Rood, head of government and industry relations at SitusAMC.

The government-sponsored enterprises could possibly stop purchasing these loans next year if policymakers were to decide such purchases are outside Fannie and Freddie’s affordable housing mission. However, it’s by no means a given, because ceasing those purchases could hurt the GSEs’ ability to cross-subsidize other mortgages that do directly finance affordable-home purchases, Rood said.

The private-label mortgage-backed securities market, which purchases loans outside the government-sponsored enterprise, Ginnie Mae and bank portfolio markets, has seen a recovery in recent months. However, because its liquidity was hit hard at the onset of the pandemic, there’s some caution around predicting much expansion of it next year.

“The private label MBS market is not currently viewed as likely to be more robust than it is today,” said Rood. Interviews with Rood and Gilpin were conducted just prior to the U.S. election in November.

The future of MSRs

If low rates continue into 2021, the value of mortgage servicing rights could remain depressed due to prepayments that erode their value. Persistent economic distress could also lead to other servicing market challenges.

Most notable of these are questions of how many loans currently in forbearance will ultimately enter the foreclosure process, when and what condition the properties will be in when they do, as Aces Quality Management CEO Trevor Gauthier pointed out.

Because government-related secondary market agencies dominate the market currently, they may play a key role in setting policy standards in this area.

After the Great Recession, servicers found that the best way to pace foreclosure pipelines was to find a balance between delays that address an interest in keeping people in their homes as long as possible and applying enough speed to avoid property deterioration that contributes to neighborhood blight.

Whatever happens with public policy next year, most prognosticators don’t think officials will want to jeopardize the main government-related mortgage-backed securities market that lenders sell into.

“I think most would argue that the government should shrink its footprint,” Rood said. “But they first and foremost need to do no harm to the housing market.”

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Secondary market MBS Ginnie Mae MSR Fannie Mae Freddie Mac GSEs Servicing