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Mortgage Rundown - At Home Edition

Alexis: Hi everyone! Welcome to the Mortgage Rundown. My name is Alexis Quinney and I have on the line with me Jason Obradovich, CIO of New American Funding. Hey, Jason, how are you?

Jason: I'm doing great, Alexis. Thank you.

Alexis: Jason, there has obviously been a lot of craziness going on in the capital markets. Can you help me and the people at home understand what's going on today?

Jason: Of course! Without going into too much of the detailed specifics, the market over the last 30 days has been just quite chaotic. You’ve seen so much go on with mortgage-backed securities, with government loans, with Jumbo loans, with Non-QM loans. Quite honestly, there's been such a loss of liquidity. Just imagine one day, billions and billions of loans that are being originated every single month, and suddenly the spigot got completely shut off; Investors said, ‘we don't want to buy any more bonds.’

Alexis: That's incredible. So, how is the market today, are there mortgage investors buying now?

Jason: Yeah, the market is in a better position today than it was in mid-March. I think we actually have a graph you can see on the screen, and what you see here is mortgage-backed security prices. And so what happened was in the middle of this whole fiasco in the middle of March, buyers said, ‘you know what, we don't want to buy mortgage-backed securities anymore. We have to protect our own organization.’ And so prices just went straight down and what happened this time, unlike what happened in 2008, is the Fed reacted very quickly. It said, ‘you know, what, we're going to support mortgage-backed securities.’ And so they started buying them and you saw the prices just rise very, very rapidly. Now since prices have reached a point where they said, ‘Okay, let's keep them right here.’ The Fed said, ‘Alright, we're going to support these prices, and we're going to hold them at these levels for whatever time being. We don't necessarily know.’ And so the Fed is doing all of this to really help support the economy.

Alexis: Okay, so the Fed is buying mortgage-backed securities. Has that fixed most problems with mortgage rates?

Jason: The short answer is no. It has fixed certain mortgage rates. So, if you're getting an agency mortgage, something under $510,000 that's going to Fannie or Freddie or even a government loan—an FHA loan, a VA loan or a USDA loan—they are supporting those markets. But there are still other markets that are really struggling: Jumbo loans, Non-QM loans, and even loans with borrowers that have some kind of impaired credit history. Those markets are really in trouble. When liquidity will return to those markets, we really just don't know. It could be six months. It could be a year.

Alexis: So, what about banks? We've heard that they're pulling back lending to borrowers. Is there any truth to this?

Jason: The real problem for banks right now is capital. Banks don't just give out mortgage loans. They give out personal loans, auto loans, credit cards, etc. And so when you have events like this, these kinds of credit events, their expectations for losses are going up and to what level, they don't know. And so they're taking a lot of their capital and reserving it against future losses and they're required to do that. That's just how banks are structured; They have to hold enough capital to cover losses for at least 12 months. So now they have less capital to give out for new loans.

Alexis: Okay, thanks for explaining that. So, does that give mortgage lenders like New American Funding any sort of advantage?

Jason: It does give us an advantage. Because we're not a bank we don't have to have capital held against credit losses. They're just structured very differently. So, as hard as this is for the economy, and for borrowers, and even from a health perspective, this allows a company like New American Funding to take advantage of these opportunities—because you have the Federal Reserve supporting liquidity. Normally, a bank would have a balance sheet to support liquidity. But now we have the Federal Reserve coming in saying, ‘Hey, look…we're going to purchase all these mortgage-backed securities at these levels of prices, and we're really not going to change them.’ So, in effect, a company like New American Funding has almost unlimited liquidity for our loans.

Alexis: All right. Awesome. Thank you so much, Jason, for setting aside some time to talk today. That was a lot of really great information and I know that it's so busy right now. I really appreciate you taking the time to provide an update.

Jason: Absolutely. Thanks so much, Alexis. I enjoyed it. Have a great day!

Alexis: Yeah, you too! And to all you viewers at home, we'll be back with the next Mortgage Rundown.