The last few months have proved challenging for lenders and servicers.
Although the longer-term impact of the COVID-19 pandemic remains to be seen, the mortgage market has settled down, and most industry players appear to have weathered the storm, according to a new report from mortgage advisory firm Stratmor Group.
“When the pandemic erupted in March 2020, it created a massive chain reaction of aggressive policy responses, major disruptions in supply and demand dynamics in mortgage markets, and a host of unintended consequences,” Stratmor said in its latest Insights report, “Some Things Never Change: Supply and Demand, Unintended Consequences and Cash is King.”
Despite the disruption caused by COVID-19, the company said the constants of market economics remain unchanged.
“The good news for the mortgage industry is that, on balance, the self-correcting nature of supply and demand has appeared to serve our industry well,” Stratmor said. “The unintended consequences, while severe, are not life-threatening to most lenders and servicers, with the possible exception of non-bank servicers that have a high percentage of loans in forbearance. And cash is still king.”
When market volatility kicked into high gear in March, “it was all hands on deck time” in the mortgage business, Stratmor added, with most short-run decisions laser-focused on optimizing cash flow and limiting the risk of events that would impact cash negatively, such as margin calls or loan repurchases.
“There was a clear need to get loans sold and funded quickly, and lenders with agency approvals
began selling to agencies as much as possible,” the company said. “While agency execution may or may not have been the best execution for lenders, the need for speed and warehouse line availability became paramount. Agency became the technique of choice to manage liquidity for agency-approved lenders.”
In addition, the report noted that many lenders reverted to selling their loans on a best-efforts basis even when mandatory execution could have yielded a higher sales price.
“Lenders wanted to mitigate the risk of large unexpected margin calls which might reduce cash to dangerously low levels,” Stratmor said.
Given the fact that investors reduced the amount they were willing to pay for loans in the secondary market, the only other primary source of revenue for lenders were the amounts collected from borrowers in the form of interest rates or fees.
One thing that has worked in lenders’ favor is that current market conditions are enabling them to charge higher rates and fees, as lenders currently have little or no excess capacity.
“The number of borrowers asking for and entering forbearance appears to be leveling off,” Stratmor added. “Concerns over liquidity for non-bank lenders have alleviated somewhat. And with rates at all-time lows, refinance transactions at very strong levels and purchase mortgage transactions slowly rebounding, mortgage originator profits are very strong right now, bolstering liquidity and capital levels.”