With capital markets pricing a 25-basis-point (bps) cut to the Federal Reserve’s benchmark rate following this week’s Federal Open Market Committee (FOMC) meeting, Mortgage Capital Trading Inc. (MCT), a mortgage secondary market advisory firm, predicts mortgage rates “will remain elevated through the remainder of 2024, barring any political or economic surprises.”
MCT’s forecast affirms mortgage lenders’ fears that meaningful rate relief is still quarters away. “All of the mortgage market euphoria about lower rates and higher anticipated increase in production has since evaporated,” the report’s author(s) noted. The appetite for mortgage servicing rights (MSRs) remains “as high as ever,” though, subsequent to mortgage rates’ sharp increase following the Fed’s first rate cut in mid-September.
“We continue to advocate caution when capitalizing new production as the market navigates a mortgage rates roller-coaster,” the report read. “Higher capitalization rates in this current and volatile rates environment could lead to fair value write-downs or impairments as we close 2024.”
The volatility has flowed from various sources. In a purchase drought, pending home sales notched a surprising bump in September. New-home sales hit a three-year low in September, but rose 6.3% on an annual basis that month. Elevated rates mean affordability constraints are bottlenecking new purchase demand, with first-time homebuyers and renters stuck renting.
Meanwhile, with the broader economy finding firmer footing, the financial health of average consumers is being closely watched by economists across the housing and finance industries.
Consumer spending fueled healthy growth of gross domestic product (GDP) in the third quarter, but October’s employment data clouded analysts’ view of the labor market, attention to which has sharpened since the Fed began cutting rates amidst fears of interest rate-induced weakening.
Aggregators dropped their pricing temporarily as lower rates fueled a bump in refinance activity in the third quarter, but the dearth of refinance and purchase volume in the fourth quarter has led aggregators to raise prices for new originations to 125-130 bps for a 30-year, par-rate loan.
Bulk MSR trading values reflect premiums of 4.95x – 5.20x multiples of servicing fees for agency loans. That premium is indicative of MSR buyers' elevated appetite for new originations amidst a shortage of supply of new originations. Yet, the lack of steady production has many MSR holders preferring to “wait a little bit more before selling some of their MSR holdings.”
“Many potential MSR sellers remain hesitant to sell their MSRs due to loan production uncertainty driven by higher than anticipated mortgage rates,” MCT’s blog notes. “Many MSR holders depend on their MSR holdings fee income to maintain their business operations.”
