PERSON OF THE WEEK: The COVID-19 crisis put a halt on the non-agency mortgage market in 2020, but issuance of non-agency residential mortgage securitizations has been on the rise in recent months.
To learn more about what’s ahead for the non-agency market in the second half of 2021, MortgageOrb recently interviewed Greg Richardson, chief commercial officer at Atlanta-based MAXEX, a digital exchange for buying and selling mortgage loans through a single clearinghouse.
Q: The non-agency market was nearly wiped out a year ago due to COVID and is now thriving as more investors and originators expand their jumbo offerings. What have been some critical components to the return of the non-agency market?
Richardson: The summer of 2020 brought historically low interest rates thanks in large part to the support of the Federal Reserve stepping in and becoming the largest buyer of agency mortgage-backed securities (MBS). Historically low mortgage rates generated a frenzy of refinance activity that resulted in repayment of cash to bond investors at a record pace.
These investors needed to reinvest this cash in a variety of asset classes, including agency MBS. As the yield on the 10-year Treasury traded below 0.50% and agency MBS spread tightened to levels never seen before, bond investors began to look to higher-yielding alternative assets, including non-agency MBS. This move drove jumbo mortgage rates to historically low levels as well, which dramatically increased jumbo origination volumes and provided bond investors with plenty of non-agency MBS deals in which to re-invest their cash.
At our company, we have seen a wide variety of buyers including Wall Street broker-dealers, insurance companies, banks and real estate investment trusts (REITs), purchase jumbo loans at competitive prices and attractive yields, whether to be held as investments or for securitization.
Q: The last two years have been incredibly fruitful in the mortgage industry with annual origination volumes hitting $3.8 trillion despite the pandemic. As that origination volumes wane with rising interest rates, and rising home prices, what should originators and investors be doing now to prepare?
Richardson: Prior to COVID, lenders were originating approximately $2 trillion in new mortgages per year. As rates plummeted during the second half of 2020, demand skyrocketed, and originators ramped up capacity to close more than $3.8 trillion according to the Mortgage Bankers Association (MBA).
The MBA is currently forecasting that mortgage originations will decline to $3.4 trillion in 2021 and $2.3 trillion in 2022 with the expectation that rates will continue to rise.
Originators will need to be nimble as we transition to lower volumes and higher rates over the next 12 to 18 months. Focus should be on adapting capacity needs by leveraging technology, retaining top-tier employees and providing borrowers with a broader base of products by maximizing liquidity through a variety of secondary market investors.
As rates rise, purchase money business will become increasingly important as consumers will still need new homes and will be less interest-rate sensitive. Historically, whether rates move up or down, consumers want to move and purchase homes for a variety of reasons.
Q: Recent regulatory rulings from the Federal Housing Finance Authority (FHFA) and the CFPB have distinctly changed how many originators currently and will eventually do business with the GSEs, specifically the ruling on non-owner occupied and second home loans as well as the new QM rule. How much bigger of a role will the non-agency market play in home loan origination moving forward due to these rulings?
Richardson: Right now, what you’re seeing is this balance of reduced production, more regulation and more restrictions from the FHFA, Fannie and Freddie’s primary regulator. The $1.5 billion limit on cash sales to the GSEs will have a dramatic impact on those lenders who originate more than $3 billion per year.
Originators will need to work with the agencies to move to MBS from cash if they want to maximize their liquidity options. This is no easy task as the agencies will look to these originators to put in policies and procedures, build out MBS delivery methodology, internal staff and technology.
In a related move, the FHFA also limited the number of second homes and investment properties to 7% of total sales. Many sellers originate much more than 7% of these types of loans, and they’ve been scrambling to find other sources of liquidity for these loans. MAXEX has several active buyers involved in this space, and we have traded several hundred million of such loans.
Some originators are already moving toward adoption of the revised QM rule ahead of the October 2022 deadline. This new price-based approach dictates that the annual percentage rate (APR) on the loan not exceed the average prime offer rate (APOR) for a comparable transaction. For loans to qualify as Safe Harbor, the APR can’t exceed the APOR for a comparable transaction by more than 1.5 percentage points. A significant number of jumbo mortgages that were previously considered to be non-QM deals will become QM eligible under this new APOR rule. So that’s going to significantly alter and transition some of the burden, which has been significant, in the non-agency market.
Q: 2021 has produced the largest issuance of prime jumbo securitizations since the financial crisis. J.P. Morgan is the leader, but many other Wall Street firms are active as well, including Morgan Stanley, Goldman Sachs, Citigroup and Bank of America. What are the factors pushing these types of firms to do more and more prime jumbo securitizations?
Richardson: At the onset of COVID, the Federal Reserve stepped in and started buying up billions of dollars of agency mortgage-backed bonds to support the housing industry. That pushed rates down, refinances spiked, and investors were suddenly flush with cash due to prepayments and looking for places to reinvest that cash.
Many of these investors wanted more yield and continued exposure to the mortgage market and started to look toward non-agency jumbo residential mortgage-backed securities (RMBS). As RMBS spreads tightened with increased demand, it drove jumbo rates lower and originations higher. Wall Street dealers have the ability to take these loans and create a variety of bonds by carving up cash flows to meet a variety of “real” investor demand.
Q: You’ve been part of the mortgage industry for the better part of three decades. Being a notoriously slow-moving system when it comes to adopting innovation, what do you think are some of the more important advancements in technology that will make the industry more efficient and transparent?
Richardson: Originators working with fintechs are hyper-focused on digitizing the mortgage experience on the front end of the business with direct impact for the consumer creating internal efficiencies that bring the cost per loan lower. While this is incredibly important, not many entities are really focused on the secondary market.
Our company, through its broad base of buyers on the exchange, is also focused on integrating many of the processes and data to bring about change and innovation to the secondary market. It really is all about the velocity of capital and providing many different sources of efficiencies to drive costs lower. This is especially important as the rates rise so that originators can stay competitive, maximize margins and provide the best rates to the consumer.
Q: On a more personal note, if you could go back and talk to yourself ten years ago, what advice would you give?
Richardson: I would tell myself to take more time for myself and read more! When you are living in the moment, there just isn’t enough time to get it all done. I have hundreds of books and I have only read maybe half of them. Set aside time each and every day to get lost in a book, learn more and sometimes, just relax!