Where are Capital Markets people focused other than on rates and bond market volatility? As if managing margins in this environment wasn’t enough, lenders are trying to stay ahead of the curve in terms of cost cutting while keeping origination volume flowing to remain profitable. Let’s look at several items that are top of mind for MCT’s clients.
Anybody who’s been in this business for any length of time has seen cycles come and go, but we are in one of the most dramatic cycles in recent memory. It’s hard, if you’re a lender, to sit there and think, “Oh, you know, we’re coming up on a recession and a recession typically means lower long-term rates.” Some companies don’t have the luxury of waiting out the current rate environment until the recession hits. And even if one does, it may be shallow and not have a huge impact on mortgage rates. What lenders are having to do is continue to cut costs, which unfortunately includes laying people off.
It’s hard to cut costs fast enough in this environment. Adding personnel or decreasing personnel is a cost in itself: finding and hiring talented individuals, training them, and then unfortunately, having to lay a portion of them off.
Thus, lenders continue to look to technology as ways of leveraging their current workforce. Earlier this week, loanDepot came out with a plan for staying alive, and it was viewed by many as drastic. “LD” will be undergoing a series of cutbacks. But loanDepot is no different than many other lenders who are having to deal with this environment that don’t have to publicly announce their plans. It’s just cut, cut, cut, and try to become as efficient as possible. Hopefully, using technology (like we provide here at MCT), many of these lenders can scale up and scale down successfully.
In terms of industry-wide trends and execution avenues, private label securitization (PLS) was “all the rage” last year and the center of discussion about possibilities and revenue enhancements. But PLS has diminished in 2022 to the point that June saw the lowest issuance in a couple of years. The recent demise of First Guaranty Mortgage and Sprout “spooked the herd” and has caused renewed scrutiny of counter-party risk in the secondary markets.
At the company level, lenders who have not reserved enough capital, or those that do not possess sufficient capital reserves, are being scrutinized by warehouse banks, broker dealers, and correspondent investors. Those entities are contractually required to see counter-party (client) retained earnings and income. And whether a lender is publicly held or privately held, revenue has been up and down this year because of the market and because of the volatility.
MCT is also seeing a lot of attention being paid to the best efforts versus mandatory spread volatility, a big hurdle especially for smaller companies.
The market is one thing, but companies continue to try to roll out new products or additional products to try to help every borrower that they can. Products such as renovation, down payment assistance programs (DPAs), community land trusts, housing finance authorities (aka, bond programs), non-Agency/non-QM, and manufactured housing are all being given a good, hard look by nearly every lender. Private investors, usually in the form of depositories, are being sought as a fresh outlet for loan products.
Most of these products are not being hedged by Capital Market staff, as the risk profile can be difficult to gauge. Instead, the risk of the rate locks with these products (typically non-Agency) is passed on to the ultimate investor. In the case of DPA programs and some of the bond programs, those may or may not be included in the hedged pipeline.
The non-QM, non-Agency (such as jumbo), and ARM products tend to be sold on a best-efforts basis directly to either portfolio investors or the non-QM passthrough companies who in turn will have a takeout on the other side with a pension fund or insurance company or somebody who’s interested in non-QM programs. Lenders will try to pass the risk of these on to try to lock in the original margin and then pass the hedging risk onto the end investor and therefore limit the lender’s risk.
Finally, on the agency side of things, Fannie Mae and Freddie Mac continue to have a focus on first-time home buyers, affordable housing, and less of a focus on non-owner and second home lending. Generally speaking, the fees from non-owner and second home lending are used partially to subsidize the the other programs by Fannie Mae and Freddie Mac. We’ll continue to see agency changes going forward as we move through 2022.
This industry is always evolving, or at least changing. Capital Markets is usually at the center of any changes that occur, and with good reason: if there is no investor appetite for a given product, either within a portfolio or from an outside investor, the lender will not offer it. And in the current environment, investors are hungry for safe, increased yield and lenders are trying to satisfy that hunger.