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May MBS, Jumbo and Non-QM Liquidity Update

Alexis: Hey, everyone! Welcome back to the Mortgage Rundown. I am here with Jason Obradovich, CIO of New American Funding. Hey, Jason, how are you doing today?

Jason: Good Alexis. How are you?

Alexis: I'm doing good!

Alexis: So, what is going on with capital markets today? Are we still seeing that same liquidity issue with mortgage-backed securities that we were a couple of weeks ago?

Jason: Yeah. Good question. Things really haven't changed a lot in the last few weeks and really in the last month. You had the Fed come out and start buying mortgage-backed securities. But really what's happened is they've pushed up the price of mortgage-backed securities and that's kept mortgage rates as low as they've been. They're really at historic all-time lows. And since then—we talked about this last week—they've kept the price really stable. And that's what their job function is: to create stability and liquidity in the market. And so right now, stability is really important.

I think a lot of people heard rumors about margin calls and cash crunches and all those things. And all that's been born from, you know, the instability and price, these huge price swings from day-to-day. And so, what they've done is they've come in—they don't tell you exactly what they're going to do—you can see a trend and they just keep buying mortgage-backed securities. And so, one of the things that we're starting to see is they really do want to drive down mortgage rates. You know, where they want to drive them to? We don't know. But if I'm a borrower, I am going to expect rates to be low for quite some time.

Alexis: And what about Jumbo and Non-QM? Are lenders still offering those programs?

Jason: You know, Jumbo and Non-QM are still really challenged. The Fed's buying agency, mortgage-backed securities—so that's Fannie Mae products, Freddie Mac products, and government products: FHA, VA, and USDA. When it comes to Jumbo and Non-QM, that's really the private market that purchases those mortgages, and so a lot of them used to be pooled into what's called non-agency mortgage-backed securities. And that market is not completely gone, but pretty close to gone. There's just no liquidity. No one's buying those and putting them on balance sheets. We talked about banks' balance sheets and not wanting to buy some of these lesser-traded mortgage-backed securities. So, what they do is they start raising their credit standards. And so you're seeing in the Non-QM and Jumbo space, what we call overlays. We don't want certain FICOs. We don't want certain LTVs. We don't want certain credit parameters. And so there's still a lot of dislocation in that space. And we just don't know when that's going to return. It might take some time.

Alexis: So where are mortgage rates right now? Are they going to be moving in any direction, do you think, especially now that the economy is starting to open back up? How do you see those numbers moving?

Jason: Yeah. Good question. I think a lot of people are concerned if the economy starts opening up, our interest rates going to run back up? From everything, we can tell, no. You know, this is one of those scenarios where the economy will open back up, but it's going to be very slow and very prolonged. So just because the economy opens back up, it doesn't mean that the Fed is just going to raise interest rates that day. Because the impact of everything that's happening right now is affecting businesses for a long period of time, affecting borrowers for a long period time, and consumers for a long period of time. We don't really know what consumer behavior is going to do. So, from everything we can tell, interest rates are going to stay low for a very long period of time. And not only that, we don't know if the Fed might want to drive rates even lower just to make sure we don't reenter a recession when we get back out of one. We still think we are in one right now, so we don't want to see a double-dip. And so, the Fed is going to have to guard against that double-dip by keeping rates low for probably through 2021, quite honestly.

Alexis: All right. That makes sense. So, will there be any borrowers who won't be able to refinance in this low-rate environment?

Jason: That's something I think the Fed is concerned about, and certainly the industry has communicated some concerns they have because what happens when you have any kind of credit crisis?

As I mentioned before, as you start getting all these overlays…banks start having overlays, any creditors start having overlays, and that really impacts a certain set of borrowers. That's really unfortunate. Because you want all borrowers to be able to take advantage of a low-interest-rate environment. I know the focus for New American funding and for, you know, probably a handful of other companies is they don't want to shut off access to lower interest rates to those borrowers. Certain banks, yeah. You know what? They're drawing a line like, 'we just don't want to have certain credit exposure.' And unfortunately, it's going to impact a certain set of borrowers. So, we are working with the industry and the federal government. You know, their ears are actually open. They are concerned because of the last crisis. There was a certain set of borrowers who just got cut off completely and they could not take advantage of rates. And so, one of the things we're talking about is how do we make sure that people of all credit profiles who had access to credit before…can still have credit now and in the future? And can they take advantage of those rates? And so, there isn't a yes or no answer to that question. It's a challenge that the industry is working on. And we certainly are a proponent to make sure those borrowers can take advantage of rates right now.

Alexis: All right, Jason, thank you so much for getting together for this quick update. This was extremely insightful and helpful and I look forward to the next one.

Jason: Yeah. Thanks so much. Thanks for jumping on the phone with me.

Alexis: Of course. And thank you to all you at home watching. We'll be back next time with the Mortgage Rundown.