Who's Gonna Buy Mortgage Paper?
In the topsy-turvy world of mortgage finance these days one of the questions on my mind is just that; "who's going to buy mortgage paper?"
Jump back a few years and every financial institution around was hungry to buy mortgage-backed securities and/or companies in the space.
The go-go real estate market fueled new ideas and new models of risk that are proving to not match the reality of human behavior when real estate prices turn south. I'm sure you've caught the stories of rising foreclosures. Of course foreclosures rise when people who were able to purchase a home with 0% or even 10% or 20% down now find themselves owing more than the home is worth. Add on top of that a forecast that it might take 10 years for us to get those homes back to the price they paid for them and you can see why people put the home back on the bank.
Back to our question on who is the buyer for mortgage debt these days.
We are in the midst of a massive tightening of underwriting guidelines and back to realistic pricing for all the various scenarios under which a new mortgage is originated. In addition, Fannie Mae and Freddie Mac are getting a green light to open up more funds. AND, the Federal Reserve is creating new credit facilities to move current, "questionable" mortgage-backed securities to the Fed during this time when no one wants them.
During these recent days I see how the credibility of mortgage-backed paper is beginning to heal.
However, let's remember simple economics. There will be fewer buyers in general going forward and that means higher prices. Higher prices on mortgage debt translates into higher rates. That means that on any given day, mortgage rates will be pricing higher than they would have a few years back when there were SO many other buyers.
We all benefited from the massive buying interest with lower rates than otherwise would have been available. Now, we move back to more normality and we need to recognize these structural changes of the marketplace.
That means, don't keep rates of the past as target rates to act. Opportunities will be dictated by our new future.
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