This article is part of our HousingWire 2022 forecast series. After the series wraps early next year, join us on February 8 for the HW+ Virtual 2022 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for next year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.
Projecting the outlook for the housing market in the coming year, including prospects for the secondary market for mortgage-backed securities, can be an exercise in crystal-ball gazing, but one indicator key to bringing clarity to that crystal ball is the direction of interest rates.
All signs point to continuing upward pressure on interest rates in 2022. Assuming COVID-19 is managed well, the overall economy is expected to continue expanding, with that growth and the still-unwinding pandemic-related supply-chain issues helping to fuel inflation. To address those pressures, the Federal Reserve has signaled it will pursue monetary policy that pushes interest rates up modestly over the course of the next year.
“The economy is steadily recovering, and inflation is kicking higher,” said Lawrence Yun, chief economist at the National Association of Realtors. “Mortgage rates will steadily rise, possibly to 3.3% by the year-end [2021] and maybe even as high as 3.7% by the end of 2022.”
With rates rising, housing-finance experts expect the focus to shift away from the refinance market and toward purchase loans. That bodes well for those engaged in trading whole loans and mortgage-servicing rights (MSRs), both of which are bought and sold in the secondary market.
“As the economy begins to show improvement and moratoriums are lifted on foreclosures, the forecast is for the re-performing loan market to maintain a high volume for many months to come,” said Tom Piercy, managing director of Incenter Mortgage Advisors.
“The jumbo-loan market has expanded too as we’ve seen property values increase nationwide. It’s difficult to quantify per se, but the appetite for jumbo loans has increased significantly.”
On the MSR front, the market also is expected to remain robust as interest rates rise, which increases MSR values. That’s because loan prepayment speeds slow when refinancing ebbs. Fewer loan prepayments via refinancing ensures that MSR assets — which represent a slice of the interest on a mortgage — will have a longer cash-flow life for investors.
“I believe the first and second quarters next year will be quite busy,” said Azad Rafat, MSR senior director at Mortgage Capital Trading Inc. As rising interest rates cool the refinance market, replacing that lost volume through home-purchase loan growth will be largely dependent on expanding the guardrails around mortgage origination, some industry veterans argue.
John Toohig, managing director of whole loan trading at Raymond James, said as rates inch upward, closer to 4%, originators will be under pressure to find more volume outside refinancing and the con-forming-loan space dominated by Freddie Mac and Fannie Mae. If that happens, Toohig said, it will provide a “natural boost for private-label securitization” — which is the private-sector secondary market that issues and sells securities without government guarantees.
“Can you find more volume in a bank-statement loan or an asset-depletion loan?” Toohig asked. “There’s non-QM, or can you go to that Jumbo 2.0 loan, and instead of a 700 FICO [credit] score, can you make it work at 660 or 680?
“Are you willing to do that? Can you maybe look at 85% as opposed to an 80% loan-to-value [ratio]? That’s going to be where you’re going to have to find your loan growth if we agree that we’re in a rising-rate environment.”
Overall, for investors in the secondary market as well as for the host of industry players in the owner-occupied and rental housing markets, 2022 should be a strong year, said Rick Sharga, executive vice president of marketing for RealtyTrac. It will be driven by demographics — specifically the millennials, most of whom are now coming of age as first-time homebuyers, Sharga said. But the one factor that could undermine a robust economy in 2022 is inflation.
“The thing that could derail us is if we had an economic downturn, and the most likely scenario I see there is that inflation continues to run hotter than the Federal Reserve would prefer,” Sharga said. “Typically, historically, when the Fed hits the brakes, it tends not to be a smooth, controlled stop, and [the economy] can slide off to the side of the road.”
The changing mortgage-finance environment and the unknowns ahead also highlight the need to address perennial issues in the housing market, chief among them risk management and housing- finance reform.
“House prices have been continuing to soar, but the GSEs, still backed directly by the taxpayers, continue to dominate the secondary market,” said Ed DeMarco, president of the Housing Policy Council, a group at the center of those discussions. “The Fed also is sending signals of a general expectation of rising interest rates, which presumably will cool the refinance market… And so, you take these things together, we think that paying attention to the risks in the marketplace is essential.”
Among the tools that DeMarco said will be key in dealing with the distribution of risk in the year ahead is the GSEs’ use of credit-risk transfers, as well as data standardization and transparency, the common securitization platform as well as the modernization of Ginnie Mae. And essential to promoting the future growth of a vibrant private-label market for issuing and selling residential mortgage-backed securities, DeMarco added, is getting Congress to act quickly on better defining the contours of the government’s space in the mortgage market.
“Congress can set the parameters for the future — not just what is the government’s role, but where that role ends,” said DeMarco. “That will allow the private market to have greater certainty about investments that it can make in this space.”
This article was first featured in the Dec/Jan HousingWire Magazine issue. To read the full issue, go here.
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