Some mortgage market participants were relieved the Fed didn’t taper in line with speculation recently, but like any rate scenario this could change and there is a downside to it, too. So to keep you prepared for anything, here’s a refresher on cyclical rate contingencies updated for recent market changes.
Players in this business “shouldn’t be making decisions based on their rate forecast but they do,” said Les Parker, senior vice president at LoanLogics and an industry veteran with expertise, among other things, in hedging. Alternatively, mortgage market participants can prepare for the different rate contingencies that could affect their business.
Consider first the upward and downward swings in rates in line with the aforementioned Fed tapering speculation.
From a lender’s perspective, the lack of Fed tapering in line with expectations was probably better than it actually was panning out (aside from any short-term borrower rush to market to beat out further increases). But the overall effect has what I’ll call a “Bad Goldilocks” aspect to it, too. In other words, rates during this period have not been “hot” (high) or “cold” (low) enough to spur either yields more attractive to investors or more refis, respectively.
“There’s a squeeze going on both ends,” said David Lykken, managing partner at Mortgage Banking Solutions.
If there’s not enough growth or concern in the economy to move the rates out of this environment and increase yields or borrowers’ spending power, one way lenders can encourage secondary market appetites particularly given the lack of investor confidence since the downturn is to focus on loan and loan data quality, Parker has said. This has a cost during what are still fairly challenging fiscal times for the industry but he said it is an upfront one and in line with regulatory directives.
Scott Stucky, an industry veteran and chief operating officer of DocuTech, said if there is enough loan data quality/integrity some careful loan product expansion in line with what the economy can support can be an opportunity in this environment, such as self-employed borrowers with sufficient downpayments.
Lykken suggests there is some opportunity in making loans to non-institutional investors pursuing buy-to-rent strategies, noting constraints to other lending unique to this market such as regulatory reform in the wake of the downturn, fiscal strains on government and high student loan debt levels.
Some think rates are more likely to move lower because of the lack of evidence of economic growth, but the view that rates have bottomed and could rise also has been popular at times this year.
While Fed tightening/higher rates have been feared by lenders as it adds to borrower costs and takes out refi incentive, it could have its advantages at some point if it reflects a stronger economy and borrower spending power and leads to more attractive yields for both investors and servicers.
In contrast, “The yields (relative to shorter-term deposit rates) are really low right now,” Stucky said. “It keeps private money out of our industry” to some extent.
Although there could be eventual advantages to a shift to higher or lower rates, a move to either extreme—particularly a sharp one—would not be good for the industry during the transition period.
With the Fed aiming at transparency, Parker suggests a sharp or untelegraphed move is less likely these days but also notes there are many capital markets factors that could affect rates.
So it’s best to be ready strategically for rates to move any direction and also to weather a transitional period between rate environments that may be tough, Stucky said.
