Consumer demand for mortgages is down, and lenders are trying innovative marketing tactics to raise their slumping production volumes. On top of that challenge, several wholesale or correspondent buyers are engaging in a price war that has caused several lenders to purchase loans at negative margins.
“I think there is a high and growing risk of a recession in 2020. You know, put it at odds of something like 1 in 3.”
Mike Fratantoni, Chief Economist and Senior Vice President of Research and Industry Technology for the Mortgage Bankers Association (MBA), delivered those words last week in a webinar hosted by MountainView Financial Solutions, a Situs company. Fratantoni shared an outlook in a broad to narrow scope that covered economic conditions, the housing market and the residential mortgage industry, and in each of those three areas he provided a mix of good and bad news.
Residential mortgage prepayment rates dropped in 48 states and the District of Columbia between the 12-month period that ended July 31 and the 12-month period that ended October 31. Nationwide, the average 12-month prepayment rate fell from 10.8% to 10.2% – a decline of 60 basis points (bps) – between the ends of the two periods.
Re-performing loans (RPLs) are defined as loans in which payments had previously ceased for at least three months but have been consistently made for the past 12-24 months. New buyers of RPLs and longtime holders of the assets continue to question how best to quantify the risks associated with loan performance and how that translates into pricing. Both investors continue to evaluate their prepayment, default and loss assumptions in the context of a tightening market over the past 18 months, particularly when portfolios have loans with such varied characteristics and performance history.
“Demand is high and values are up, so it’s a good time to sell,” could be one potential summary statement about the current state of the residential mortgage servicing rights (MSR) market. On the other side of the market, many buyers and holders of the MSR asset are saying, “yields are attractive and MSR financing is readily available, so it’s time to buy” or, “I need to keep those customer relationships, so I’m going to retain the servicing instead of releasing it.