A Systemic Problem How the Coronavirus Pandemic is Affecting Capital Markets

A SYSTEMIC PROBLEM

How the Coronavirus Pandemic is Affecting Capital Markets

By Rob Chrisman, Captial Markets

The coronavirus has knocked the financial markets off their feet, including all facets of the mortgage origination process. Potential borrowers won’t meet with LOs, notaries are hesitant to perform their functions, and county recorders are partially staffed. It is a systemic problem. In the capital markets, no one wants to buy certain types of loans and certain types of servicing. Mortgage pricing has become erratic at every lender, and prices no longer move in tandem with U.S. Treasury securities. Investors that were paying higher-than-market prices for loans in 2019, and for the rights to service those loans, are watching those same loans refinance and the expected servicing income vanish.

The bond market, and therefore interest rates, continues demonstrate concern about jobless claims, which might be understated as small companies (restaurants, retail etc.) are not offering employees hours. Some economists believe that our national unemployment rate, which was 3.5 percent in February, will hit 30 percent. (It hit 24.9 percent in 1933.) The good news? Some analysts believe they will snap back quicker than normal this time depending on the length of the pandemic.

The Federal Reserve has put swap lines in place to enhance liquidity in the currency markets, and, on March 23rd, announced a basically limitless support of the Treasury and MBS markets. The Fed buying hundreds of billions of dollars of mortgages helps to calm markets. During stress in the world economy, central banks need liquidity as the demand for dollars skyrockets, and the swap lines will enable other currencies to remain supported.

Throughout March, Agency MBS prices have been volatile enough. But in the non-Agency market, non-QM is now bleeding into the jumbo market. Most lenders shut down non-QM investors and products as no one wants to be the last retail or wholesale lender offering a particular product. NonQM and jumbo investors rely on capital markets for liquidity, and this dried up in the second half of March. One mantra for anyone in capital markets is to always have two or more investors for any loan type. Some warehouse banks feel the same way.

The combination of liquidity in the non-Agency bond market drying up, Agency paper being very volatile, and lenders pricing to capacity, has driven mortgage rates back up. Lenders need a sound secondary market, but in the second half of March investors found MBS unattractive. No one knows how broad or what the duration of the economic effects of the coronavirus will be, or what will happen to credit risk, delinquencies, and foreclosures. The uncertainty causes lenders to offer higher rates compared to the traditional spreads. And there is an industry-wide capacity problem of trying to close five times the normal industry yearly average in three months. It isn’t going to happen.

In this type of market and economy, the big fear lies in delinquencies and foreclosures. Put another way, rates are great, but if a borrower can’t make their payment, what difference does it make? We could easily see delinquencies reach 2008-2010 levels. Freddie Mac and Fannie Mae have put programs in place to help borrowers, help with verbal verifications of employment, and help with the appraisal process. Economists everywhere are lowering their forecasts for global economic growth to include a global recession that we can expect will be short but deep. This recession, while helping keep rates low, will hurt millions of potential borrowers across the United States in terms of their credit; thus, in qualifying for a refinance or purchase. Through all of this, lenders are concerned about having adequate warehouse lines and programs to fund their clients’ loans, and are doing the best they can to ride out the storm in the capital markets. MBM