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Jason Obradovich - Chief Investment Officer

Housing Market Update Center

Translating the complexity of the markets into a concise and easy to digest format. Watch videos, read blogs, and view key data on short and medium term trends impacting interest rates, so you can make the right decision for your situation.

Latest Market Update

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 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 they 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.

Previous Market Update

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.

 

 

 

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