At the beginning of 2020, low-interest rates and strong job growth contributed to a steady climb in consumer-purchasing power, which led to an uptick in both refinance and purchase demand.
But as the COVID-19 pandemic rapidly spread in March, many of the nation’s consumers were either forced to work remotely or not at all, as the incredibly infectious disease forced countless businesses to close their doors.
This, in turn, put pressure on U.S. markets as the Department of Labor reported nearly 3.3 million people filed for unemployment the week ending March 21.
In an effort to stabilize the economy, the Federal Reserve announced a pledge on Monday to purchase unlimited amounts of Treasuries and mortgage bonds, which they believe will grease the wheels of the credit markets.
The purchases also attempt to avoid the type of credit crunch seen after the collapse of the financial system in 2008 and could result in new lows for home-loan rates.
But will these rate declines benefit the housing market?
In an exclusive video interview, HousingWire spoke to Mountain Lake Consulting’s CEO David Stevens about the economy’s recent turbulence and what the Fed’s decision means for the mortgage industry.
Stevens, who is the former president and CEO of the Mortgage Bankers Association and an industry titan who currently serves on several advisory boards, explains why bond-buying may or may not be good for the market.
This interview has been lightly edited for length and clarity.
Q: This week, the Fed announced the unlimited purchase of MBS and treasuries, adding multifamily. How do you think this will impact the housing market overall?
A: That was a critical move, as anybody in the mortgage industry knows rates increased the week prior, and that was due to what we call an imbalance in the supply of mortgage-backed securities in the marketplace.
This was caused by two things: one was the origination pipelines were very full and then secondly, a lot of holders of mortgage-backed securities, were unloading them based on concerns about prepayment speeds.
It was not only causing rates to rise but it was also putting some institutions at risk for margin calls. This could have had a really negative impact on the economy.
So, the pressure was put on the Fed starting late last week, and people were working all through the weekend trying to get an announcement. While we were actually hoping for an announcement Sunday evening, it came Monday morning and it was a critical announcement that they would step in and create what’s called a short in capital market standards, and that has helped bring rates down.
I think as everybody knows, mortgage-backed security pricing really rallied over the last day or so. And while other issues are affecting interest rates, it’s having a really good impact so far.
Q: We know bond-buying is aimed at providing liquidity and pushing rates lower. Do you think this is likely to bolster the economy?
Well, the variables we’re facing right now are entirely different. Two weeks ago, we were barely talking about the coronavirus, and now, the whole world has changed. So, there’s a lot of things affecting rates.
It’s not just the value of mortgage-backed securities, it’s servicing values and servicing values have worsened fairly significantly.
What we don’t know is the details of the $2 trillion legislative package that has just been announced and hasn’t even been drafted yet. At this point, It’s just the terms on an agreement.
As of today, these things are all going to have an impact on the supply of treasuries in the marketplace, because they’re going to have to raise money to pay for this legislation.
So, on one hand, the bond-buying should drive rates lower in a traditional sense, but what we don’t know is what the overall supply of debt is going to be and what it ultimately means for interest rates.
Read the rest of the Q&A and watch the full video interview with Stevens below.
Q: Do you anticipate rates reaching lower than 3% this year, and if so, what does this mean for the overall housing market?
I think an overall rate decline is always good for homebuyers, those that own homes now and those that can potentially refinance. It infuses the economy with a lot of spendable cash for consumers. And if you can lower mortgage payments and rent payments, that could theoretically impact households across the country.
All of this is positive, and at some point, the amount of debt that this nation is putting on its balance sheet, from the previous tax plan that was passed in this administration, debt that was inherited from previous administrations and now this extraordinary $2 trillion package, will ultimately put upward pressure on rates.
But in the short run, I think lower mortgage rates would be better for our economy, consumers and the housing market, which is a critical sector.
We should all expect as we get through the curve of the virus, that rates probably will begin to drop back to levels we saw leading into this event.
Q: There is a lot of news coming out right now. What do you think the industry should be focused on that they maybe they aren’t?
I think right now we’re going to be engaged in a lot of quality control variables we need to consider. The other thing I would just say is, as we come out of this, and we are far from done, there’s going to be a lot of stress, particularly on the servicing community, and particularly on those that are in the Ginnie Mae business more than the Freddie Mac and Fannie Mae agency business.
But we know the non-qm markets are frozen, and the jumbo market is getting dried up, co-issue has essentially gone away. There’s a lot of impacts in the correspondent space, servicing stress is going to go up and depending on where you operate geographically, you may inherit some of that risk at your company based on your borrower profile, your pipeline and the kind of body control you put in place.
So, at this point, I think it’s all hands on deck, and team meetings with leadership that include operations, production, capital markets, and more, is going to be really important to make sure that we all get through this together.
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