2020 will be remembered with a mixture of emotions for the US mortgage industry. It was a very difficult year dealing with COVID, but also an exceptional year in terms of record production that dates back to 2004. The industry posted record profit margins early in the year, although secondary market spreads narrowed as more capacity went online.
The members of the Federal Open Market Committee made it clear that they will continue to buy mortgage-backed securities at a monthly interest rate of around $ 100 billion. By the end of the year, the FOMC will purchase nearly $ 60 billion in MBS for the Open Market Account system.
The Fed's massive buying of mortgage debt means that the low interest rate environment that has pushed the industry to record levels will continue for the next several years. And as long as home and mortgage demand remains constant, the industry is likely to avoid serious credit problems – aside from the blatant Cares Act exception and government forbearance costs that come with it.
One of the basic rules for secured finance is that the collateral follow the mortgage certificate. As long as the value of the collateral is stable or, in the case of today's market, steadily increasing, the note holder is protected. This does not mean that mortgage servants and investors won't have problems, but it does mean that if the industry in general fails, the loss is likely to be extremely small.
This statement may surprise some people. As of the third quarter, the default rates relate to loans from the Federal Housing Administration. FHA crime is now nationally at 15.8%. Various states have higher, downright subprime crime levels, with New York at 17.56%, Texas at 18.29%, Maryland at 18.56%, Louisiana at 19.56%, and New Jersey at 20.01%.
The interesting thing about these numbers, however, is that the crime rate tends to heal before the loans go past 90 days, much less to foreclosure. In comparison, conventional loans have high single-digit insolvencies and bank borrowings are below 2%.
And in any category from one to four family loans, actual net depreciation and foreclosure rates stay low and even decrease. More importantly, with bank portfolios and conventional loans, the default loss is close to zero or even negative. Why? Because of the generosity of Chairman Jerome Powell and the FOMC.
Mortgage lending and services are an interest sensitive business. In the post-COVID world, where the Fed currently has a balance sheet of more than $ 7 trillion, the obvious conclusion is that credit volumes and house prices are likely to remain strong for the next few years. Think of 2020 as the bottom in house prices for this cycle, with a big correction in house prices in 2024 or after. Time to buy a house people.
The fact that interest rates are low, or even falling, in the US means that many loans that are now classified as "criminal" are likely to be liquidated near foreclosure. Part of this positive trend can be attributed to the interest rate environment, and part to the vastly improved capabilities of the mortgage industry.
However, these facts do not prevent some uninformed souls from creating many unrealistic scenarios about market risk. As mentioned earlier, the main threat to independent mortgage lenders comes from the FOMC and Congress open market operations from the Cares Act.
For example, the Financial Stability Oversight Council, encouraged by the director of the Federal Housing Finance Agency, Mark Calabria, remains concerned about the potential risk posed by non-bank mortgage service providers. Mind you, not lenders, highly indebted hybrid REITs or NPL purchase funds, but mortgage service providers.
In 50 years there has been no public record to suggest that the failure of a non-bank mortgage servicer poses a systemic risk to the US economy or a threat to consumers, yet the bureaucrats led by Calabria persist in their ill-informed reasoning .
Take another example, which is loans guaranteed by the Veterans Administration. Morgan Snyder, owner of CAllc Research Publications in New York, recently argued in NMN ("This Will Be Our Next Mortgage Crisis") that "troubled" no-bid "loans from the Veterans Administration could bankrupt servicers in the near future . " Synder's dire prediction of VA loans may apply in a different economic and interest rate environment, but not "in the near future."
Many people in and outside Washington fear that the fact that VA loans are eligible for "streamlined" refinancing poses a risk to taxpayers similar to the fiasco the FHA sees due to poor or no appreciation of the reverse HECM bleeds credit. In fact, streamlining the refinancing of FHA and VA loans, which are primarily interest rather than disbursement refinancing transactions, reduces the risk.
VA refinance loans to cut interest rates, as the rationalization product is called, do not require an income check, a mortgage-only credit check, no maximum loan-to-value ratio, and no rating. Some observers fear that LTV rates on IRRRL loans could go well in excess of 100%. However, as with FSOC and non-bank risk, such concerns ignore the public records and actions of the FOMC.
First, VA loans have the lowest foreclosure rates of any US loan, according to the MBA's National Delinquency Survey. VA-guaranteed loans have a foreclosure rate of just 1.98% versus high-quality loans with a foreclosure rate of 2.47%. This is better credit performance than bank loans.
Why? Because our men and women in uniform tend to take their financial obligations seriously. Credit servicers also make every effort not to exclude soldiers. They know that if a soldier gets into trouble, they can reach the VA and get an instant response.
More importantly, however, concerns about non-banks and about markets like FHA and VA lending ignore the strong and obvious asset impact of the FOMC's aggressive interest rate policies. In other words, banking and non-banking service providers don't buy early acquisitions from Ginnie Mae pools to lose money. FHA and VA loans are not the preferred asset of all service providers, but they are not a source of tax risk. Some high-touch servicers even like distressed government-insured assets.
Suppose a servicer buys a criminal FHA or VA loan from a Ginnie Mae pool and the agencies refuse to take over the house. You collect the reimbursement of capital and expenses, repair the asset, and sell the home to an emerging market. The more skilled distressed servicers will break even or maybe make money on this transaction.
Rather than looking for risks that don't exist, the Fed, FSOC, and FHFA-led regulators should tackle advanced streamlining refinancing for conventional and bank-owned loans. Just copy the existing programs at FHA and VA. Lowering the budget for housing will improve lending, protect taxpayers and consumers, and help the economy recover from the dire effects of COVID.
Yes, we're going to have another nasty real estate market correction in a couple of years, but that's up to the Fed and not a problem caused by non-bank mortgage lenders or their regulators. Think about it and have a very safe and wonderful vacation.