When the secondary market closed during the pandemic earlier this year, lenders were particularly concerned about two things: whether borrowers could still pay, and whether they had enough places to sell loans.
They hope for a better result in 2021 without forgetting the lessons of the risks of the market 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 for 2021 because you just don't know where things are going and we've seen things go one way pretty quickly this year," he said. "When that happens, you just have to adapt."
For Gilpin, this means staying in touch with whatever outlets they can sell to what they believe they can achieve through traditional networking. However, other players could turn to secondary market trading platforms, he noted.
When the pandemic broke out, Gilpin, like many lenders, saw that these secondary buyer options were quickly falling back on state outlets, and he adjusted accordingly. But the market rally seen last year has made him hopeful that he may sell to more buyers next year.
"We didn't sell much in the secondary market, which went to investors alongside Fannie Mae, Freddie Mae and Ginnie Mae this year, but we're working to keep those relationships going so we could be ready by January," he said.
"My conversations with account managers at the larger aggregators have shown that people have come back," Gilpin added. "I would expect more people to sell to aggregators part of that flow that goes straight to the agencies."
The booming origins of interest rate incentives combined with diverting sales have caused the conduits through which agencies to buy credit to swell. For example, Fannie Mae saw its overall credit channel growth 150% year over year in the third quarter, absorbing sales from small and medium-sized lenders in the third quarter.
There is a great deal of uncertainty surrounding public policy and the pandemic that will determine the extent to which government agencies will compete for credit with investors in the private market over the next year.
Among the many possible reforms that policymakers are considering for Fannie and Freddie – who shared mixed feelings about the level of government involvement in mortgages – include price adjustments and proposals to reduce GSEs' involvement in certain types of loan purchases would.
"One of the studies they are evaluating at the GSEs is whether it is really part of their mission to support second homes and investment properties," said Tim Rood, director of government and industrial relations at SitusAMC.
Government-sponsored businesses could potentially stop buying these loans next year if policy makers decided that such purchases were outside of Fannie and Freddie's affordable housing mission. This is by no means to be taken for granted, however, as discontinuing these purchases could affect the GSE's ability to cross-subsidize other mortgages that directly fund affordable home purchases, Rood said.
The private label mortgage-backed securities market, which buys credit outside of government-sponsored Ginnie Mae and the banking portfolio markets, has rebounded in recent months. However, as liquidity was severely affected at the beginning of the pandemic, caution is advised if a significant expansion is forecast for the next year.
"The MBS private label market is not seen as more robust right now than it is today," said Rood. Interviews with Rood and Gilpin were held just before the US election in November.
The future of MSRs
If the low interest rates persist through 2021, the value of mortgage service rights could remain depressed due to prepayments affecting their value. Persistent economic distress could also lead to other challenges in the services market.
Most notable are questions about how many currently lenient loans will ultimately enter the foreclosure process, when and in what condition the properties will be at that point, as pointed out by Trevor Gauthier, CEO of Aces Quality Management.
Since government secondary market agencies currently dominate the market, they can play a key role in setting policy standards in this area.
After the Great Recession, service technicians found that the best way to speed up foreclosure pipelines was to strike a balance between delays aimed at keeping people in their homes for as long as possible and applying enough speed to to avoid property deterioration that contributes to the destruction of the neighborhood.
Whatever happens to public policy over the next year, most forecasters don't think officials want to jeopardize the major government-related mortgage-backed securities market by selling to the lender.
"I think most would argue that the government should reduce its footprint," said Rood. "But first and foremost, they don't have to harm the real estate market."