By Christopher Bennett
“New year, new me” seems to be the popular slogan for 2020. While this may not be a completely apt description of the mortgage market outlook for the coming year, the market can expect to see some changes, particularly in the specified pool and to-be-announced markets, alongside a continuation of trends in other areas that have been picking up momentum throughout the past 12 to 18 months.
One of the biggest trends for 2020 is an increase in granularity when it comes to execution (i.e., specified pools), which stems from the agency side of things but is equally applicable to investor attitudes and behaviors. Over the past few years, there has been a steady increase in the number and types of low-loan-balance and other specified securities being issued. New entrants on the buyer side have helped drive this execution, and the industry can expect that to continue throughout the year.
Further, the market can anticipate additional variety on the loan characteristics that will drive the formation of these pools. Whether it’s extending beyond $200,000 for a cap to upwards of $275,000 or loans where the borrower has a second mortgage, used down payment assistance, etc., there will be a strong appetite for pools with any characteristic that is going to give investors a slower prepayment speed. As such, the market should see an improvement in the liquidity of these pools compared to 2019 and even going back to 2018.
Of course, this all depends on what happens with the Federal Housing Finance Agency’s plan to increase the number of government-sponsored enterprise-securitized loans routed into larger multilender pools. The plan’s intent is to improve liquidity and build future interest in UMBS issuance by non-government investors.
This year will also see a higher disconnect in the difference between TBA mortgage-backed security pricing and actual levels that are being paid for new production by mortgage originators, whether they be depositories or independent mortgage bankers or credit unions. This spread began widening quite a bit in 2019 and will continue expanding in 2020.
New production, by the very definition in most cases, has a higher value than something that might be six, 12, 24 or 36 months old. In 2020, investors are going to pay up even more for current production as the market sees greater convexity in TBA prices, which are not matched by the convexity in prices for new production — all of which goes back to the point about increased granularity in the coming year.
As the Fed has communicated, and more importantly the market believes, the three easings in the Fed funds target and the IOER have brought Fed policy to a neutral level. The market now expects a stable FOMC policy and no change to short-term interest rates in 2020. This stability will drive more buyers into the servicing marketplace both on the co-issue side as well as the bulk side, which will ultimately provide better and more stable executions.
While the push for e-note adoption has been happening for a while, 2020 looks to be the year when the market will see significant eNote production and, consequently greater e-note acceptance. It wasn’t that long ago when only one or two lenders were responsible for the vast percentage of the whole universe of e-notes that were being delivered. Now, more and more companies, vendors, warehouse banks and investors are getting on board with eNotes, and that’s a trend the market should continue to see increasing this year.
On the delivery side, the increase in technology is speeding things to the point where a lender can deliver loans to investors the same day that they’ve won a bid and been allocated. Thanks to the efficiency and error reduction inherent in the digital mortgage process, lenders can drive down delivery periods from 10 days to only two in many cases, which translates into more money for the bottom line. The last hurdle to make this happen involves handling the note. Once that is cleared increased e-note adoption should make this scenario a reality for more lenders in 2020.
Speaking of technology, another trend for 2020 will be the continued increase in application programming interface technologies. As lenders take more of the loan production process digital, the market should see vendors invest significant resources to allow their systems communicate with others more seamlessly and without the need for human intervention. Lenders that have doubled-down on their commitment to going digital in 2020 may also see themselves invest in developing APIs to cover any technology gaps outside of what can be addressed through their vendors.
For a market that succeeds often in spite of the uncertainty that surrounds it, the ability for lenders to expect a level of continuity in 2020 is a welcome state of affairs. Of course, just when one expects the market to head in a certain direction, it can be guaranteed to do the exact opposite. However, general market volatility aside, lenders should feel relatively confident in these five themes and strategize accordingly.