October 28, 2024 | Premium Service | In this issue of The Institutional Risk Analyst, we provide our subscribers the latest Outlook on Housing Finance for Q4 2024 and 2025. We also update readers on the latest financial results from New York Community Bank (NYCB), PennyMac Financial (PFSI) and Mr. Cooper (COOP).
Suffice so say that the residential housing industry expected higher volumes last month when the FOMC cut the target for fed funds 50bp, but since October began rates have backed up at least that much, as we discussed in our last comment (“Powell Overshoots the Runway; Update: American Express & Charles Schwab.”)
September was a good month for many issuers, but October may be equally disappointing, both in terms of cash and hedge results. It’s interesting to note that Fannie Mae and Freddie Mac both saw big declines in issuance in September, but volumes in the Ginnie Mae market increased, Inside Mortgage Finance notes, largely due to refinance volumes. Credit costs remain muted but are steadily increasing in low-income cohorts. The chart below shows total delinquency slowly rising across the $13 trillion residential housing finance sector.
Sources: MBA, FDIC
Below we provide some thoughts on housing finance and how different issuers among banks and nonbanks will be affected, both good and bad. And in our latest column in National Mortgage News, we ask whether the abortive risk-based capital proposal from Ginnie Mae for nonbanks will ever be finalized.
Q: Just why did G-10 bank regulators assign a 250% credit risk weighting to mortgage servicing assets, payment intangibles that have no credit risk? Op-risk? Yes, but no credit risk. Let’s try a 150% risk weight for bank MSRs under Basel III, yes? That makes a little more sense than does 250% risk weight for MSRs.
The first point to make is that mortgage rates are headed back toward 7% since the Fed’s September action. Traders and issuers have been forced to suddenly change direction 180 degrees on loan pricing assumptions and hedging. The chart below from FRED shows the dramatic turn on the 10-year Treasury and the 30-year loan note rate.
With the spread between 2s and 10s in the Treasury market positive for the first time in years, many market participants persist in asking the wrong question. Ask not when spreads between 10-year Treasury notes are going to come in, but rather how wide they will get as the Treasury market continues to back up. The green line shows Treasury 2s minus the 10-year Treasury yield.
