Residential lending is likely to see the greatest impact in the form of muted movements within the agency MBS market, as well as in multifamily and jumbo markets due to pullbacks in bank investments, according to Bose George, managing director of investment firm Keefe, Bruyette and Woods. By necessity, depository institutions are lessening risk to avoid the fates that befell Silicon Valley Bank and First Republic this year.
"The reduced role of banks, either through potential failures, but also just the general reduction in their exposure to this sector will lead to more products and services from the nonbanks," he said at the Mortgage Bankers Association secondary markets conference in New York.
The jumbo sector was driven primarily by low-cost deposits at banks, with
"As they get higher, it should bring in private investors," he said.
Similarly, banks have been the
"Over the next few years, we see a very large need for capital, and a lot of that has to come from outside the banking system," George said.
The agency MBS market will also see diminished support, as banks, which made up about 30% of activity, play a smaller role, he said.
In the near term, a likely default on the U.S. debt is ahead, according to both George and Isaac Boltansky, director of policy research at BTIG, countering some of the optimism coming out of the nation's capital over the weekend. Although their models show a breach of the debt ceiling would likely be short, "even something that lasts for a few weeks could be quite disruptive for the companies that depend on the capital markets," George said.
While he saw a narrow pathway toward a potential agreement between President Biden and congressional leaders before the end of the month, Boltansky said the chances of the U.S. avoiding default were dimming. "It's messy," he said.
"Even if they agree, you've got to get 100 Democrats in the House to say 'yes' to this. You've got to get, depending on how you count it, 10-plus or so Republicans in the Senate."
Meanwhile, some of the calls for action resulting from recent banking are not likely to move forward either, in Boltansky's view, mostly due to lack of will for compromise between the left and right wings of both parties.
"I can tell you with some degree of confidence that Congress won't act. They're not going to expand deposit insurance," Boltansky said. While there's general agreement, the conditions each side of the political aisle will demand will cancel each other out.
"Just like that, the ball game's over. And that's where we've been with deposit insurance for some time."
Elsewhere, in regards to regulatory oversight, Boltansky mentioned the potential for regulatory overreach of financial services following recent bank headlines,
"I'm not afraid of the FSOC itself. I'm afraid the FSOC's work, though, can grease the skids for other actors in the regulatory system," Boltansky said.
Despite growing regulatory pressure's potential effect on nondepository institutions, which George described as "incremental" for independent mortgage banks, they still sit in a position to see growth in the home lending market, he said.
"When you compare the two sides, IMBs are still in a far better position, so we expect them to continue growing their presence in the mortgage market," George said.
