Market Update: A Bouncing Ball For the past couple of months the 10yr has been stuck in a range between 2.60% and 2.80%. One week yields are down and the next they are up, and the cycle continues. Yields dropped this week on Thursday when Retail Sales came in strong and today they are relatively flat despite weak PPI and University of Michigan Confidence data (both counterintuitive). Clearly the market isnt trading on weather or US economic data. Events overseas certainly have everyones attention. The market is subject to headline risk over the events in the Ukraine. If Russian troops cross the border, we could see 10yr yields drop to 2.50%. If they dont cross the border, will yields move back up? Maybe but I think they will need to move away from the border to get yields up. Tensions are escalating and the threat of economic sanctions doesnt exactly ease ones mind about the world economy. Will the ball continue to bounce or will someone come along and kick it? Today the 10yr sits at 2.65%, well below where many predicted rates would be when the year began. Refinance activity is certainly down over the past year with volume only 1/3 of what it was a year ago, according to the MBA. And despite what you hear or think, purchase volume is actually down from a year ago. In fact the combined purchase and refinance activity is at the lowest point in more than a decade (see graph below). Many predict the spring market will bring the purchases up but its certainly hard to say about refinances. Mortgage banking is a cyclical business and this past winter brought more than a polar vortex. Id expect smaller players to now face those difficult decisions on whether or not they can afford to stay in the game. On a more positive note, the non-agency market is continuing to expand. With the huge uncertainty of what will become of Fannie Mae and Freddie Mac, new capital is finding its way into the private market via correspondent/conduit operations. A lot of the talk about non-QM lending being the next big thing is starting to materialize. The big question will be whether or not the price hit for non-QM will be accepted by borrowers. The non-agency space is as big as… well space. And by non-agency, I mean anything outside of what Fannie, Freddie or Ginnie will allow. On one end you can have a borrower who short sold their property last year and on the other end is a cash rich billionaire who doesnt get a paycheck. Both fit in the non-agency space. While many non-QM buyers are fashioning themselves as buying from the top down, based upon their pricing they are more likely to originate from the bottom up. Millionaires and billionaires dont need to borrow money and likely wont accept the rates that non-QM originators are offering. Lower credit buyers likely dont have other alternatives. Guess who takes the non-QM loan. Non-QM might turn into Subprime 2.0. Private banking institutions, wealth managers and others likely will always cater to the credit wealthy borrower with attractive rates so non-QM becomes more subprime like based upon its own pricing design. Why price like that? Banks or any depository institution for that matter typically doesnt chase after high yield with high risk. They have regulators that are there to protect the depositors. Banks inherently look for acceptable yield with acceptable credit exposure. The liquidity offered by Fannie, Freddie and Ginnie securities also allow for rates to stay very low. Basically any borrower that is offered a loan through a normal bank or through agency securities will have a very low rate. Non-agency market participants are yield players. They want higher yields under the belief they can manage the risk appropriately (some can and some cannot). Those yields are very high, closer to 8-9%. Some are more realistic, offering rates in the 5s. Ill answer the why so high? another day. But for now, if you are borrower whos DTI is over 43% on a fixed qualifying rate of 4.5%, would you take a non-QM lenders rate of 5.5% which now pushes your DTI up to 50%? Or would you settle for a 7/1 or 10/1 ARM at 3.5%, dropping your DTI to 38%? As I see it now, some of non-QM will simply move into hybrid ARMs. There are other aspects of non-QM that this wouldnt resolve but you get the point. Non-QM still has a way to go to define itself. Fed rate decision next week, appropriately on the last day of Winter.
Posted on: Sat, 15 Mar 2014 06:14:17 +0000
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