Analysts and executives in the mortgage industry see the turbulent future ahead. The banking crisis is still unfolding, affecting the mortgage-backed securities (MBS) sector, reducing jumbo loan offerings and putting pressure on commercial real estate companies.
Even if the US debt ceiling impasse is resolved, the US could face a downgrade of its long-term debt, impacting the economy as a whole. In addition, there is still overcapacity in the mortgage industry, meaning that conditions will continue to be tough for mortgage originators.
Executives discussed these and other topics at Monday’s meeting. Mortgage Bankers Association (MBA) 2023 Secondary and Capital Markets Conference & Expo in New York.
Is the banking crisis over?
Bose George, Managing Director Keef, Bruyette, Woodssaid the banking crisis would still have a significant impact on the mortgage industry.
In the agency MBS segment, where banks account for around 30% market share, spreads have “slightly widened” and will continue “structurally.”
“Banks don’t seem to be very active in this area,” George said.
Banks will also reduce their appetite for jumbo loans. They usually offer jumbo loans with lower interest rates to attract borrowers for other commodities. But now the deposits are even scarcer, George said.
And what does that mean for the rest of the market? “At least it means higher interest rates.”
George also said the banking crisis is affecting commercial real estate and the market is already weighed down by hybrid and telecommuting trends.
“What is happening in banks right now will definitely reduce capital in this area.
Overall, he expected banks to play a lesser role in the mortgage market, which he said seemed “inevitable”. As a result, the role of non-banks will also increase. George also anticipates a need for significant capital, including through equities, over the next few years.
What impact will the debt limit deadlock have?
Isaac Boltanski, Director of Policy Research BTIGsaid of the debt ceiling debate, “I am concerned about where we stand as of this Monday morning.”
The executive said there is a “narrow road” to the June 1 deadline. U.S. Treasury Department If Congress doesn’t move to raise or suspend the debt ceiling, it may not be able to meet its debt obligations.
Meanwhile, debt limits between Republican-dominated parties have stalled. House of Representatives and President Joe Biden’s White House It continues to cause uncertainty within the market.
According to Boltanski, it’s important to remember what happened in 2011 when the S&P downgraded the long-term US credit rating, citing an “unsustainable fiscal” line and a “broken political system.”
“We still have both. And what’s different from 2011? Our total debt went from $14 trillion to $30 trillion,” Boltanski said.
The official said any political deal on debt limits would not solve the problem. “We start with the real drivers of long-term debt that aren’t even discussed.”
Is a recession approaching?
“Financial conditions are tight,” said Mike Fratantoni, chief economist and senior vice president of research and industrial technology at the MBA, adding to expectations that the U.S. will slip into a recession this year.
“When we got together for our annual convention in Nashville in October, we predicted to some degree that we would be in recession in the United States in 2023,” Frantatoni said. “Given what we have just experienced, we intend to maintain that expectation.”
But Fratantioni said a recession would probably be “a little longer” and “more severe” as credit tightening could put more pressure on the U.S. economy.
Inflation is still doubling, Fratantoni said. Federal Reserve’The (Fed) target is around 4.5% and the job market remains strong. “Trying to get a coherent message out of Fed officials” is difficult, but “we are not in a rush to cut rates right now.”
With the debt ceiling stalled, MBA’s baseline scenario does not include the US government defaulting on its debt. But “the biggest risk is a downgrade.”
Fratantoni said mortgage rates peaked in the third quarter of last year and are now volatile. Reffis has “moved away from the center of the big picture” so he is 30% to 35% behind in terms of sales in 2022 purchases.
“Given the decline in volumes, especially unit numbers, we thought we would have to pull about 30% of our capacity out of the industry. It’s a tough environment,” said Frantantoni. “The good news is that people continue to pay their mortgages.”