Mortgage applications fall off a cliff on a short week
The MBA Applications index rose 11% after falling 13% the week before, which was a holiday-shortened week. Refinances drove the increase, with an 18% jump in the index. Purchase activity also rose, although only slightly. The summer selling season is winding down, and we’re entering a slow period that will last through the winter months. Last year, refinance activity drove business for mortgage bankers. Now, they’ll have to rely on purchase activity, which tends to be very seasonal.
The market takes a breather ahead of the FOMC (Federal Open Market Committee)
Last week didn’t have much in the way of market-moving economic data. The August jobs report was released on the Friday before, and the FOMC meeting was coming up the next week. Rates fell slightly, which helped mortgage applications. Many people who felt like they’d missed the refinance boom took advantage of the lower rates after the weaker-than-expected jobs report. That said, homebuilders are noticing a stall in momentum as increased rates take a bite.
Big opportunities ahead for mortgage REITs that focus on origination
The mortgage market is undergoing a massive transformation as the private label mortgage market returns. Bob Corker (R-TN) and Mark Warner (D-VA) recently introduced a bill to end GSEs (government-sponsored enterprises) and put the government in a re-insurance role. All the securitization that was done by Fannie Mae and Freddie Mac will now be done by private entities, some of whom could be mortgage REITs. Recently, President Obama laid out his plan for the future of mortgage origination, and it looked very similar to the Corker Warner bill.
Since the bubble burst, mortgage origination has been almost exclusively government-driven. The big buyers of new origination have been the agency REITs like Annaly (NLY) and American Capital (AGNC). The U.S. government bears 50% of the credit risk of the entire U.S. mortgage market. Originators typically don’t hold their mortgages: they either sell them to the big banks or securitize them. Since the securitization market has been dead, originators have no outlet for non-agency mortgages. Redwood Trust (RWT) has been the only issuer of private-label mortgage-backed securities (securities backed by mortgages that aren’t government-guaranteed), and it has focused exclusively on high-quality jumbo loans. Pennymac (PMT) noted on its call that origination increased nicely in the second quarter.
In the beginning of the year, we saw a wave of private label deals, but subsequently, spreads have widened and the deal flow has slowed. The vast majority of the deals were extremely high-quality loans with significant over-collateralization, so they look nothing like the private label deals done at the end of the bubble. The sense is that more deal flow will happen once the government settles on how it wants to regulate private-label securitizations. Finally, increases in origination will help servicers like Nationstar (NSM) and Ocwen (OCN). Servicing has increased in value tremendously ever since rates started rising, with newly originated conforming MSRs trading at 4x cash flow.