Morning Report: MBA urges FHFA to go slow on GSE limits

Vital Statistics:

	Last	Change
S&P futures	3916	16.4
Oil (WTI)	59.33	1.57
10 year government bond yield		1.63%
30 year fixed rate mortgage		3.30%

Stocks are higher despite a lousy durable goods number. Bonds and MBS are up small.

Durable Goods orders fell 1.1% in February, which was well below the consensus estimate of 0.8% growth. Ex-transportation, they fell 0.9% and core capital goods orders (sort of a proxy for business capital investment) fell 0.8%.

Mortgage applications fell 2.5% last week as rates spiked. Purchases increased 3%, while refinances fell 5%. “The 30-year fixed mortgage rate increased to 3.36 percent last week and has now risen 50 basis points since the beginning of the year, in turn shutting off refinance incentives for many borrowers,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity dropped to its slowest pace since September 2020, with declines in both conventional and government applications. Mortgage rates have moved higher in tandem with Treasury yields, as the outlook for the U.S. economy continues to improve amidst the faster vaccine rollout and states easing pandemic-related restrictions.”

While refis are falling, we are still well above where we were pre-COVID. Below is a chart of the MBA refinance index.

The MBA sent a letter to Treasury Secretary Janet Yellen and FHFA Director Mark Calibria urging them to reconsider the GSE purchase caps. The MBA expressed concern about the limit on high risk (low FICO / high LTV) caps of 6% on purchases and 3% on refis. It also discussed the problem with investor property caps.

MBA said when the amendments to the PSPAs were announced, Treasury noted that these limits were “aligned with [the Enterprises’] current levels” of investment property and second home acquisitions. Market volumes in these segments in 2020, however, were lower than in prior years, and data from recent months suggest that heightened sales and refinance activity in these segments is driving an increase in GSE acquisitions of these loans. As the GSEs have begun to implement the investor/2^nd home caps in the past week, the market for these loans has deteriorated significantly as investors impose loan level price adjustments to avoid getting an excessive volume of loans that the GSEs cannot purchase.  It is not clear that private market participants currently have the capacity or resources to absorb the entirety of the gap between the GSE limits and the volume needed to satisfy underlying demand.   

At least for the low FICO / high LTV paper, there is an alternative outlet: FHA. For investment properties we are starting to see some investor interest in AUS compliant / non-guaranteed investor property loans. That said, this is a completely new product and there have yet to be any securitizations of this. One potential issue is the capital treatment that banks will have on these. If these loans require higher reserves than traditional Fan and Fred MBS, then banks will be reluctant to hold them and that will affect pricing.

The MBA’s point is a good one, that these loans were artificially depressed as a percentage of all loans in 2020 due to the plethora of easy primary refinances. At a minimum, the MBA is urging FHFA to slow down: “Under a more flexible approach and timeline, the Enterprises could make necessary adjustments to their automated underwriting systems, which would alleviate concerns about existing loan pipelines and better protect against market disruptions. Gradual changes also would provide time for private capital alternatives to develop the operational capacity to serve these market segments.”

The typical mortgage originator did $1.5 billion in the fourth quarter and made 137 basis points.