New York | As we head into the bottom of Q3 2020, risk managers and investors face a tough puzzle. Financial markets have rebounded to the point where all-time highs are within reach for some equity market benchmarks, but fundamentals like earnings and lending volumes are weakening in most of the financial sector. And even with the record volumes of mortgage loans sold in June and July, risk remains a large factor for bond investors due to torrential flows of loan prepayments.
We’ve noted that the sector known as Mortgage Originators and Servicers outperformed most major indices in July, this according to a note by KBW. This was in part due to the successful IPO by Rocket Companies (NYSE:RKT). But more to the point, interest rates are low and likely to stay that way for years to come, at least listening to the statements coming from the FOMC. We look for continued strong volumes and earnings from nonbank mortgage issuers.
Lending has started to decelerate slightly from the torrid levels of June and July, when total issuance of mortgage-backed securities exceeded $350 billion, a record going back more than a decade to the mid-2000s. The chart below shows the latest data from the Federal Reserve on bank lending. Notice that nonbanks, which are driving much of the growth in mortgage lending, are not included.