Opinion

For mortgage markets, the outlook is sunny

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In Detroit, several of the local hospitals have been broadcasting the Beatles hit, "Here Comes the Sun," throughout the hospital every time a COVID-19 patient comes off of the ventilator. There is no equating life and death with the bond and mortgage markets, of course, but as the industry has experienced many consecutive weeks of a normal, liquid, functioning bond market, one can’t help but feel that song is equally as appropriate for describing the market outlook right now.

While the Federal Reserve's action the week of March 23 tremendously overdid things, sending mortgage-backed security prices skyrocketing over 500 basis points, its later move to a more measured pace of participation has helped do what was originally intended, to help support liquid and relatively stable MBS markets. While there may have been a bit of pain felt early on, things have gotten better, slowly but surely. Just like volatility begets volatility, calmness helps support continued calm.

It is important to differentiate between what happened in March, with the incredible global shock that resulted in a universal investor pullback during the crisis, and what can be expected now that we once again have stable markets. Up until stocks began collapsing on Feb. 24, investors were largely paying close to full and fair value for loans and servicing, which they had been month-in and month-out since late 2012.

From the start of the crisis in the MBS and whole loan markets on Feb 24 to its peak on March 30 — with the investor seizure of the government credit box, implosion of the servicing market (in 24 hours) and freezing up of half the dealer trading in the country — even the best investors had pulled back pricing by 150 to 250 basis points from the full and fair value that had been paid for nearly a decade. The good news is the now-fattened margins that can be had on today's locks will help to erase the deficit a number of firms experienced in late March and early April and bring the first half of 2020’s gains back into solidly positive territory.

Even still, it can be hard to see the difference between precrisis loans and the current environment sometimes, but companies have been moving forward. For example, while at one point during the depths of late March, some lenders temporarily shifted to locking most all of their loans best efforts, now the pendulum has swung back in the other direction, and lenders who sell to investors have gone back to hedging most everything (except lower credit score government-insured and high-balance loans), as the spread between best efforts and advanced executions is incredibly strong. Investors are even paying prices of 106-109 for Federal Housing Administration loans again, which further signals returning investor confidence in the market.

In addition, the incredible volatility in March forced a number of lenders to close their lock windows at 5 p.m. Eastern time — the time when the market closed. Now that the bond market has calmed down, most lenders have taken their rate sheets and/or product and pricing engine out of lockdown mode and resumed following their normal rate lock policies and procedures.

These examples underscore the fact that the market volatility late in the first quarter that was triggered by the COVID-19 pandemic has largely abated. For lenders that were engaging in mandatory executions pre-COVID, this is welcome news, and for those still using best efforts, now is the perfect time to make the switch to mandatory.

Of course, a second spike of the virus in fall, as some are predicting, could trigger another round of market instability. But now that the unprecedented has lost its novelty, lenders are better prepared to respond accordingly. Until then, lenders can expect (mostly) clear skies and sunny days in the mortgage market, which is a welcome bit of fresh air.

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