Capital Markets Are Driven By …

GSEs, private institution originations, shifts in demand play leading roles

Insider

Contributing Writer

Often times there is a tremendous amount of speculation in the mortgage industry regarding supply and demand, the foundation to any free market. While mortgage activity remains a sticking point for the economic and housing outlook as we move through 2023, recent data indicates that lending standards are easing, and supply is increasing in the mortgage market.

Many research and economic departments focus on residential mortgage debt, of which new issuance has fallen to low levels while the inventory of housing available for sale continues to remain sluggish. If you look at institutional investment, mortgages as a percent of total assets have fallen due to bank-level concerns, summed up by “Do we want to own MBS or jumbo loans in our portfolio?” This brings us to question the fundamentals of our market, specifically, what is holding down stronger growth in the mortgage market?

When we ask, “Who is the primary driver of supply?” the government-sponsored entities (GSEs) are a good place to start. GSEs have made up the majority of growth in the mortgage lending market, and Fannie Mae, Freddie Mac, and (indirectly) Ginnie Mae, have surged in mortgage originations compared to private institutions. Mortgages originations from private entities, like insurance corporations and affiliate institutions, have fallen to historical lows, mainly as a function of their inherent risk premiums; it’s hard to compete with the GSE’s daily rates. And yet jumbo loans, for example, don’t have fees to guarantee investors of their performance, and may actually offer more attractive rates.

Ebb & Flow

Private securitization, usually comprised of jumbo or non-QM loans, tends to ebb and flow based on the demand by investors. The rates in the primary markets, which move through into the secondary markets, tend to be 1.5-3.0 percentage points above the average rate for GSE (conventional conforming) loans. It’s important to note that the current lending environment remains relatively inexpensive (compared to only a decade ago) and that the percent of loans approved but not accepted has fallen in recent years; this traditionally indicates that borrowers are likely not turning down loans because of any “rate barrier”. As some will note, the Dodd Frank Act and the Volcker Rule place limitations on the risk level associated with mortgage originations for some lending institutions, and certainly is suppressing mortgage lending growth to a point. And the bank failures in March dampened demand from other banks.

Demand by borrowers for mortgage products could be parsed into a hundred categories, as there are substantial differences among loan applications by income, gender, race, and ethnicity. It’s no shock that the highest income bracket has consistently applied for more mortgage loans than any other bracket. This difference peaked in the 2004-2006 period when the top income bracket applied for more than four times as many loans as any other bracket; the top income bracket tripled the applications submitted by any other bracket in 2013. The second-highest number of loan applications came from the income bracket that was 50-79% of their metropolitan area’s median; it’s intuitive that the lowest income bracket applied for the least number of mortgage loans.

Shifts In Demand

With shifting socio-economic responsibilities in today’s world, demand for loans by gender has shifted over the past few years. Historically, applications have been primarily led by males although there was a brief period from 2005-2007 where females led the number of mortgage loan applications. During this time, the percent of loan application denials by gender was fairly even, leading many to believe that the surge in female loan applications was likely due to increased confidence in loan approval rates for females.

Mortgage originations from private entities, like insurance corporations and affiliate institutions, have fallen to historical lows, mainly as a function of their inherent risk premiums.

Since the past recession, however, males have applied for more loans and have been denied for fewer. Joint applications for loans have consistently had the lowest denial rates.

But in recent years minorities have driven the demand for home mortgages. This is a reversal from the recession period, where this group saw one of the largest declines in mortgage applications. White/non-native population has consistently applied for the highest number of loans; however, there has been a switch in demand between the Black population and the Asian population. There has been a decrease in demand among the Black population, which, until 2008, had applied for the second-highest number of mortgage loans, while the Asian population has increased demand to surpass the Black population for the second-highest rank. And the Hispanic population has surpassed the expectations of many in terms of demand for housing and mortgages, and most lenders view this as a growth opportunity.

Macro Factors TBD

The mortgage market, after peaking in 2020 and 2021, has slowed throughout 2023. Millions of borrowers have 30-year fixed rates around 3% or lower. Popular opinion appears to support an increase in activity in 2024 and beyond as the market gains momentum, consumers adjust to higher mortgage rates, and spending needs require cash out refinances. But of course, these are dependent on many macro factors yet to be determined.

Mortgage supply is a relatively lopsided affair, as it has shifted towards government-sponsored enterprises, which have received the highest number of applications over the past couple years and have originated the largest number of mortgage loans. Mortgage demand has seen some shifts by income, gender, race, and ethnicity over the past few years, which could be due to multiple factors including denial and lending rates offered. Higher income individuals, usually males, and some minority populations have shown the largest increase in mortgage demand since the credit tightening. If lending standards ease, expect demand to pick up across other categories and spur further growth in the mortgage market.