COVID-19 vs 2008: How another recession could impact mortgages

Here’s a look at the latest developments in the mortgage market for the week beginning 4/20/20.

• How a COVID-19 recession would affect mortgages vs. 2008
• Servicing market shift contributes to rate volatility
• Fed slows bonds purchases, rates jump slightly above all-time lows
• Homebuyers are leveraging technology to shop during lockdown

How a COVID-19 recession would affect mortgages compared to the 2008 crisis

Unlike 2008’s financial crisis, which brought mortgage lending to a halt, post-2008 safeguards combined with timely and unprecedented Federal Reserve actions may have ensured that lending can continue in the event of another recession. More stringent requirements have left banks very well capitalized with huge inflows of deposits to lend against. Tighter post-2008 lending standards have also decreased the risk of borrower default. So even in a recession, there may still be an appetite to lend to creditworthy borrowers.

In normal times, mortgage rates track the yield on the US 10-year treasury bond. In a recession, however, bond yields typically go down as the prices of the bonds go up. The Federal Reserve has already proven their willingness to buy as many bonds as are necessary to keep that relationship stable in this crisis, so there is reason to believe that they might use their purchasing power to support the flow of credit to borrowers in any coming recession.

Servicing market shift contributes to rate volatility

When a mortgage is sold, the Mortgage Servicing Rights (MSRs) can be sold separately from the mortgage itself. Servicing means collecting payments on the mortgage, and forwarding them to the owner of the mortgage. For this often complex work, servicers are paid a fee — usually .250% to .375% of the outstanding principal amount. This cash flow continues as long as the loan exists. Lenders can typically sell their MSRs for around 1.25% of the loan value. In 2019 alone, $635B of servicing rights were sold from big banks to non-bank servicers.

Recently, with 5.5% of all mortgages in forbearance, servicers will still be on the hook to forward payments that they may or may not be able to collect. Not only do potential delinquencies affect the cash flows of servicers, but the actual operations involved become more costly as additional work is required to collect payments. No servicers want to take on additional commitments, which means lenders must retain and service the mortgages they originate themselves. This increases the risk taken on by lenders, who are likely to continue raising and lowering rates every day to manage that risk.

Fed slows bonds purchases, rates jump slightly above all-time lows

Mortgage rates remain near the all-time lows they hit in March, driving refinance activity 10% higher last week than the previous week, and nearly 200% higher than this time last year. The Federal Reserve, however, is beginning to purchase fewer Treasuries and Mortgage Backed Securities (MBS), originally purchased in larger amounts to stabilize the mortgage market and interest rates. The faster-than-expected tapering of MBS purchases caused prices to fall, thereby slightly increasing mortgage rates for borrowers. The silver lining is: this looks like normal functioning of mortgage markets, signalling that crisis mode is on pause, and mortgage rates may remain relatively stable after last month’s wild swings.

Homebuyers are leveraging technology to shop during lockdown

Even though COVID-19 restrictions have made purchasing difficult, buyers are indicating they are still in the market for new homes. A survey by the National Association of Realtors found that up to 25% of agents had facilitated a sight-unseen purchase, with many making use of virtual property tours. 10% of respondents even said they were seeing the same level of activity as before the crisis.

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