May 22, 2023 | Premium Service | Whalen Global Advisors today published the Mortgage Finance Outlook for June 2023, the unique review and outlook for the US mortgage industry. WGA Chairman Christopher Whalen comments on some of the key findings in the report on the eve of the Mortgage Bankers Association Secondary Market Conference in New York.
“A lot of lenders tell us and their clients that mortgage rates are headed to 5.5% this year, but we beg to differ,” notes WGA Chairman Christopher Whalen. “We think that further Fed tightening, plus sales of MBS from FDIC and banks generally, may force mortgage rates higher into the 7% range in 2023."
Home prices in the US rose 40% during the period of massive open market intervention by the Federal Open Market Committee from 2020-2021, yet the average loan-to-value ratio at the end of 2022 was 91% for first time home buyers.
Questionable loan repurchase claims by the GSEs, Fannie Mae and Freddie Mac, are soaring as these agencies desperately try to shed low-coupon loans created during the Fed’s period of “quantitative easing.”
In many cases, the conventional loans subject to repurchase demands are performing and show no signs of delinquency, yet FHFA Director Sandra Thompson is pressing repurchase claims nonetheless.
Low coupon loans represent a dire threat to mortgage lenders and even the GSEs themselves, which must repurchase delinquent loans from conventional MBS pools at par. The Community Home Lenders of America report that lenders are losing as much as 30% of the original face amount of the loan when these mortgages are modified, re-pooled and sold into MBS in the secondary mortgage market.
“Home prices have only fallen 5% since the peak of average prices nationally a year ago,” notes Whalen. “Yet somehow, we have less than 10% equity supporting the residential mortgage market generally after almost a decade of extraordinary policy from the Fed.”
The report notes that the equity beneath FHA/VA loans is basically zero, with a 97% average LTV nationally. Further declines in home prices will be manifest in higher credit losses for the GSEs, and the FHA and other government insurers. WGA expects residential home prices in high-cost blue states to continue to weaken, while lower cost red states are likely to see continued gains.
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