#MBASecondary23: For Secondary Markets, a Cautious Economic Outlook
(l.-r.: Mike Fratantoni, Nicholas Maciunas)
NEW YORK–Mortgage Bankers Association Chief Economist Mike Fratantoni and Nicholas Maciunas, Executive Director with JPMorgan Chase, New York, offered a cautiously optimistic but guarded economic outlook here at the Mortgage Bankers Association’s National Secondary Market Conference & Expo.
“We think mortgage rates peaked earlier this year,” Fratantoni said. “Our best hope is that we’ll get through the volatility of the next few weeks,” he added, referencing closely watched negotiations between Congress and the Biden Administration on raising the debt ceiling and avoiding a federal government default.
Fratantoni noted mortgage interest rates more than doubled over the past year—and it’s having a marked effect on mortgage originations, particularly refinancings.
“There is still potential for more refinance cash-outs, particularly for those homeowners who have built up a lot of equity,” Fratantoni said. “But the purchase market is more interesting. The purchase market is running about 30-35 percent behind volume from a year ago; it’s a very challenging environment.”
The MBA forecast calls for originations to remain flat through 2023. “We’re in a market that is supply-constrained,” he said. “Builders have had to offer incentives, and existing home sales continue to drop, largely because of a lack of inventory.”
Still, MBA expects mortgage originations to reach $2.2 trillion in 2023. “That’s not as strong a market as in previous years, but it’s still pretty strong by historical standards,” Fratantoni said.
The most recent MBA Quarterly Performance Report also illustrated a challenging environment–independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $1,972 on each loan they originated in the first quarter—but it represented an improvement from the reported loss of $2,812 per loan in the fourth quarter. And the most recent MBA National Delinquency Survey showed delinquency rates continuing to hover near record lows.
“The good news is, people continue to pay their mortgages,” Fratantoni said.
Maciunas noted unique challenges facing the mortgage-backed securities market. “Spreads have been pressured wider by the regional bank crisis and FDIC (Federal Deposit Insurance Corp.) supply,” he said. “For most of the past 15 years, the Federal Reserve has been more involved in the mortgage securities market. Now, the Fed is practically absent.”
Maciunas said money managers have had to absorb a huge amount of supply from the Fed, banks and organic issuance. “Back in 2021, the Fed was buying MBS; banks were buying alongside the Fed. In 2022, everything changed; the Fed stopped buying MBS and banks had to do the same. We expect more of the same in 2023. The banks are a really interesting part of the market this year—holding on to MBS drove some of these banks into insolvency, SVB being among them. So money managers are buying more MBS, but their terms are tougher, too.”
Will banks ever buy MBS again?
“I think they will come back to the market,” Maciunas said. “Banks have a very small sandbox with which to play, and they have to either have something on hand, or something to get rid of. Banks will probably need to hold on to more liquid assets in the future, and mortgages will probably become more attractive than Treasuries. Over the next year, I expect an asset build.”
Maciunas noted recent regulatory turmoil, such as the Federal Housing Finance Agency’s recission of its loan-level price adjustment rule for Fannie Mae and Freddie Mac and the Federal Housing Agency’s 30 basis-point reduction in mortgage insurance premiums, “haven’t been as interesting to us as they have Congress or the markets. All of this gets factored into a prepay model. What’s more concerning to us is that the market isn’t balanced right now.”
MBA expects a mild recession later this year. Fratantoni said absent a recession, employment rates will likely remain low; consumer spending would remain steady; and housing demand would remain strong.
“That doesn’t resolve the lack of housing supply,” Fratantoni said. “And that could result in higher rates.”
