Analysis

Refis from Record-Low Rates Muted, But Effect Is 'Not Zero'

Rates continue to fall to never-before-seen lows but this refinancing wave is unlikely to match the size of the one seen when rates last fell to new depths earlier this year.

"The impact is now smaller," said Art Frank, director and head of mortgage-backed securities research at Deutsche Bank Securities. "[Underwriting] standards are tighter and [industry] outreach is diminished."

The Mortgage Bankers Association's refinancing index, a measure of loan application activity, has been around 3000 lately, compared to 6000 when record lows first hit in the spring, he noted. The refi index hasn't even reached 3500 since the beginning of June, he added.

The latest prepayment numbers last Thursday at press time had not been released but Mr. Frank was anticipating only a modest pickup.

He noted that refi-driven prepayment surges in 5 and 5.5 coupons would likely be scarce but the effect of delinquencies on 6s and 6.5s in terms of modifications and buyouts of delinquent loans could be a "bigger concern" in early 2010.

While the effect of recent record-low rates may be less of a driver in the context of prepays than loan performance, and is not expected to be very large, it is "not zero," Mr. Frank noted. (However, where rates are headed - like the prepayment number - was somewhat unknown at the time of this writing. Key employment numbers that could determine that were set for release last Friday after this column went to press.)

As previously noted in this column, rates are expected to rise early next year if the Fed stops buying agency MBS by the end of the first quarter. But other investors are likely to step in as it departs and ensure the rise is a gradual one.

On a recent trip to visit Asian accounts, Mr. Frank said opinions on agency MBS were varied with some continuing to buy while others expressing the opinion spreads have been too tight and have been waiting for spreads to widen out with the Fed's planned departure. For several players, concerns about the future of Fannie Mae and Freddie Mac have "diminished significantly" in contrast to what was seen just before the two agencies were placed into government conservatorship, he said.

The Years in Review

2009 and 2008

It was the worst of times. It was the worst of times. That sort of says it all, doesn't it?

Before we get into the state of the market (and a brief overview of what went wrong) let's state the one "positive" that seems obvious but hasn't been said all that much: there is always going to be a need for home mortgage lenders and servicers. But as of this writing it's unclear - to say the least - what the future holds for the industry. A year from now there's a good chance the question will not have been answered either. (We'll address the future of mortgage banking later on in this white paper.)

The Biggest `Untruth' About the Mortgage Crisis: That it was caused by CRA loans made to lower income citizens living in cities. Just visit new home developments in the Inland Empire of California. Not too many inner city borrowers there - but lots of stated-income loans.

Indeed, predicting the future is a fool's game and predicting when exactly the mortgage and housing industry will turn - and what the outlook will be for mortgage professionals - is probably the most foolish endeavor of them all. Still, it needs to be done. And there's no point in discussing (for too long) how we, as a nation and industry got into this mess. The short story is this: Wall Street, in its thirst to increase profits, discovered the subprime residential business and embarked on a liquidity spree by providing warehouse lines of credit to too many undercapitalized subprime lenders. The Street - Bear Stearns, Lehman Brothers, Merrill Lynch, take your pick - funded these companies and then turned around and securitized their loans. The reason for the fall: loan quality. Wall Street and the wholesalers feeding them product threw residential mortgage standards out the window. This may sound like a gross over exaggeration, but during the `boom' years just about any loan applicant with a pulse could obtain a mortgage, be it stated-income, alt-A, payment options ARMs, and various other nontraditional loan types. (Note: Bear and Lehman are now dead. See what happens when you play with fire?)

Macro Environment

Mortgage Employment

Existing Home Sales | Housing Starts | New Home Sales

Source:Bureau of Labor Statistics/MortgageStats.com

Metropolitan Areas

Top Metropolitan Areas by Lending Volume

All Metropolitan Areas