I recently conducted a poll of senior mortgage banking executives. Since 2008, the poll has been conducted twice a year – first at the MBA (Mortgage Bankers Association) National Secondary Market Conference in May, and then at the MBA Annual Convention in October. I was encouraged to carry on with the survey despite cancellation of the May conference. The survey is a collaborative effort by the MBA, MGIC, & TSL Consulting.

Thirty-three senior-level executives from a cross-section of lenders were surveyed, with half of the group from banks and the other half from IMBs. Within the two groups were small, medium and large lenders. The lenders’ mean size was $20.5 B, with a median size of $5 B. All the polled executives are mortgage industry veterans and MBA members. Those surveyed are organized to represent a microcosm of the MBA’s lender members. The executives answered 78 questions on an array of issues and topics of interest – and consequence –to the mortgage industry. Here, we’ll discuss five findings of special importance.

Finding I: Impact of Covid-19 on Mortgage Operations

Below are the first 5 questions of the survey and the last one. The objective was to obtain an understanding of how the pandemic was affecting their companies, i.e., their overall mortgage operations, staffing, revenues and expenses. The initial 5 queries offer a picture of the industry during the pandemic, and the last question (Q78) provides a consensus opinion of the virus’s duration. Participants were asked to answer questions based on a scale of 1-10, with 10 having a higher value.

Q-1   How adversely has your firm been affected by Covid-19?  (1-10)    5.3 mean / 5 median

Q-2   How severely has the virus affected day to day mortgage operations?  (1-10)   4.8 mean / 4 median

Q-3   How severely has the virus affected employment at your firm?  (1-10)   1.9  mean/ 1 median

Q-4   How severely has the virus affected your firm’s revenue?  (1-10)   2.6 mean / 1 median

Q-5   Has the virus increased operating expenses at your firm?  Y-19 / N-14

Q-78 For how many months do you think the effects of Covid-19 will linger and cause societal disruptions?  24.2 mean / 18 median

All things considered, the pandemic has been very kind to the mortgage banking industry, certainly more so than for many other retail service industries. Deemed an “essential business” in most states, mortgage companies scarcely missed a beat. Strong production continued, at near to record levels for many lenders, despite unprecedented volatility in the money and bond markets, and a virtual lockdown of the American economy. Against this backdrop, lenders successfully moved loans from application to closing and beyond. Q4’s responses regarding how adversely their firms were affected are explained by margin calls, hedging losses and volatility. Scaled 1-10, a 5 means it was only half-bad, difficult but doable.

Meanwhile, the severity level on day-to-day operating was described as challenging yet it didn’t slow volume at most firms, and again, scored about a 5 of 10. As for the effect on employment, revenue and operating expenses? None, nil and modest – even at firms reporting higher operating expenses. Q78 was the survey’s closing query. Its accuracy will lift the uncertainty about nearly everything time-wise. If the executives’ expectations prove correct, a return to normalcy is 18-24 months away, so early 2022 at best.

Finding II:  The Near Overnight Shift to Remote Operations

There were 4 questions about the virtually overnight shift lenders made to remote operations in order to keep the doors open while meeting public health guidelines. To understand the scope of the transition, the panel was asked:

Q-38   What percent of your mortgage staff has been working remotely?   93 / 95%

Q-39   Do you think your firm was well prepared to operate remotely?   Y-30 / N-3

Q-40   Has working remotely worked well, possibly even boosting productivity?   Y-26 / N-5

Q-41   Are remote operations a temporary fix or something more permanent structurally? TF-5 / MP-27

Q-42   Are secondary market executions still limited and more expensive than pre-March?   Y-29 / N-2

Since the pandemic hit in March and caused dozens of states and local governments to issue stay-in-home orders, companies have had to operate from disparate locations, with most employees working from home and with skeleton staffs in the headquarters office. Technology made it possible. For example, one mortgage company represented in the survey reported that of their 45 employees, only 4 meet in the office every day — the Secondary Marketing Manager, 2 shippers and a government-insuring post closer. Three days a week, a set-up specialist comes in to accept and deposit application fees and process mail. All other firms were similarly staffed.

Finding III:  Forbearance Arrives Nationwide

The CARES Act introduced the national mortgage market to the concept of forbearance. Heretofore, it was employed to defer PITI payments for relatively short periods of time, say for areas devastated by tornados, hurricanes, and such. Under the Act, any borrower with a government-guaranteed mortgage can request forbearance for up to 12 months, initially for 6. Here are my questions for the executives:

Q-15   Is forbearance take-up by borrowers interfering with loan deliveries?   Y-19 / N-12

Q-16   By July 4, what percent of FHA borrowers do you think will seek forbearance?  17 / 20%

Q-17   By this same date, what percent of agency borrowers will seek forbearance?  11 / 10%

Q-18   How much strategic forbearance by borrowers do you think is going on? (1-10) 4.9 / 5

Q-19   In retrospect, will society look back at granting forbearance as being a mistake?  Y-7 / N-25

What was learned was:

  • Forbearance take-up, for most lenders, interfered with delivering loans
  • About 10% of agency loans and 20% of FHA loans were expected to be under forbearance by July 4
  • Some forbearance requests appeared to be strategic
  • The executives didn’t think granting forbearance in a pandemic would prove a mistake

Finding IV:  Primary Market Activity

What’s a survey of mortgage executives without checking on activity in the primary and secondary markets? Four questions were asked about the primary market:

Q-11   Are homebuyers and sellers holding back/off for the time being?  Y-25 / N-8

Q-12   Is Covid-19 threatening the traditional spring home buying season?  Y-31 / N-1

Q-13   Compared to last year, how much lower will your firm’s purchase activity be this year? 26 / 20%

Q-14   Will refinance activity fill the void left by reduced purchase business?  Y-30 / N-3

Their answers reflect what they were likely reading and hearing from sales staff and customers:

  • By a 3-to-1 margin, homebuyers and sellers are said to be holding back from the real estate market
  • At best, the spring buying season has been pushed back a couple of months
  • Purchase business is expected to decline 20-25% in 2020 compared to 2019
  • Executives expect refinance activity to fill the drop in purchase business. The margin was 10-to-1, so any shortfall was expected to be satisfied

House prices have been rising for a decade, up 43.9% over that period, according to the S&P Case Shiller Index. Though narrowly, the 33 executives don’t expect a shift from the longstanding seller’s market; a sizeable majority don’t expect entry-level house prices to decline later in 2020; and, of those who do foresee some price softening, most think it will be modest at around 5%.

Q-29   Do you expect the long-standing sellers’ market to become a buyers’ market by year end?  Y-14 / N-18

Q-30   Do you expect entry-level house prices to be lower by year end?  Y-13 / N-20

Q-31   If so, by how much do you think house prices will decline by year end?  7 / 5%

Finding V:  Secondary Market Issues

Hedging pipelines is never easy, but the volatility of mid-to-late March was perilous, with margin calls and losses not uncommon. Within this background, these 5 questions were asked:

Q-6   Were secondary and pipeline hedging the areas hardest hit by the Fed’s actions?  Y-28 / N-4

Q-7   Are hedging and pipeline disruptions still prevalent in the market today?  Y-22 / N-9

Q-8   Did the Fed’s operations create hedging losses and margin calls at your firm?  Y-24 / N-8

Q-9   Were the losses threatening to the firm’s continued operation?  Y-5 / N-22

Q-10 Were you satisfied with how your hedge firm advised your firm?  Y-9 / N-4 / NA-20

Agreement was widespread: Secondary and pipeline hedging were the two areas deemed most difficult to manage and protect positions, given record-size price swings in MBSs. Markets were reported to be much improved in early May, though still not 100%. Hedging losses were commonplace across lender types; margin calls were less frequent, with none at banks.

For 18% of the firms surveyed, losses threatened the firms’ continued operation, at least temporarily, according to the executives. Most firms were unscathed. And of those lenders using hedge advisories (a surprising minority of those surveyed), twice as many lenders were satisfied with their counsel than not.

The following 8 questions dealt with the GSEs. Most ask about the support they provided the executives’ companies during difficult recent times. First, look over the questions:

Q-21  Have the GSEs been especially supportive of your firm the past few months?   Y-19 / N-11

Q-22  Scaled 1-10, how supportive have Fannie & Freddie been the past few months?  5.5 / 6

Q-23  Has support from your Fannie Mae AE been especially helpful in this difficult period?  Y-14­ / N-11

Q-24  Has support from your Freddie Mac AE been especially helpful in this difficult period?   Y-13 / N-12

Q-25  What letter grade would you give Fannie Mae for helping stabilize the market in March?  C+

Q-26  What letter grade would you give Freddie Mac for helping stabilize the market in March?  C+   ­­­

Q-27  Do you expect the GSEs to be recapitalized and released as public firms in the next 2 years? Y-4 / N-28

Q-28  Have loan repurchase conversations with investors, including Fannie and Freddie, begun? Y-8 / N-22

Based on input from those surveyed on this line of questioning, one would likely conclude that Fannie and Freddie were moderately supportive of lenders and helped stabilize the secondary market. AEs for the twosome received very average grades. Some talk of investor repurchase requests (mostly from correspondent lenders) was heard.

The second to last question on this issue, Q27, wondered whether the executives thought the pandemic was responsible for putting on-hold any FHFA plan to “recap(italize) and release” the two federal agencies. Seems not; consensus suggests that any FHFA plan will be postponed — by nearly a 3-to-1 margin.

The final set of secondary market related questions dealt, respectively, with secondary market executions; the return to normalcy in the TBA market; interest rate spreads, bids for Ginnie Mae servicing; warehouse credit; and, of course, margins. Here are the questions:

Q-42   Are secondary market executions still limited and more expensive than pre-March?  Y-29 / N-2

Q-43   Is the TBA market back and fully operating at a normal level?  Y-13 / N-16

Q-44   Are MBS-to-Treasury spreads back to where they were in January and February?  Y-0 / N-31

Q-45   Is Ginnie Mae servicing getting a good solid bid these days?  Y-0 / N-31

Q-46   Have warehouse lenders reduced or cut off credit to some of their customers?  Y-24 / N-6

Q-47   Has your firm been directly affected by this credit tightening?  Y-5 / N-26

Q-48   Is it true that while margins are back, they’re insufficient to make up for no SRP?  Y-11 / N-20

Based on tallies of the questions, one might conclude:

  • Various secondary market executions, including co-issues, jumbos, MSRs, CRTs and bulk, weren’t attracting bids
  • The TBA market was near normal in early May
  • MBS-to-Treasury spreads were abnormally wide
  • Ginnie servicing wasn’t commanding even one multiple
  • Four times as many executives heard of warehouse lenders (modestly) tightening credit, but only a handful of their firms were directly affected
  • And finally, margins were reported back – nice plump margins even without a servicing bid.

Conclusion

The mortgage banking industry is once again operating at a high point in time, i.e., activity is solid and margins are wide. Business is robust thanks largely to refinancing activity prompted by record low mortgage rates. But purchase activity has been strong, due in large part to demographics. Even more importantly, the industry pivoted, literally within days, to remote operations almost without missing a beat. January- and February-level activity continued, pandemic notwithstanding. Not only did mortgages get made, in near record amounts and with handsome margins, but the practiced emergency contingency plans worked to great success.

Compared to other types of business, mortgage lending continued (almost) full speed through a pandemic. Bravo, mortgage banking industry!

(For a full report of the findings and to scan through the Scorecard and see how the 33 executives’ responses tallied on all survey questions, contact your local MGIC representative.)

The opinions and insights expressed in this Q&A are solely those of its interviewee, Tom LaMalfa, and do not necessarily represent the views of either Mortgage Guaranty Insurance Corporation or any of its parent, affiliates, or subsidiaries (collectively, “MGIC”). Neither MGIC nor any of its officers, directors, employees or agents makes any representations or warranties of any kind regarding the soundness, reliability, accuracy or completeness of any opinion, insight, recommendation, data, or other information contained in this blog, or its suitability for any intended purpose.

Tom LaMalfa

Tom LaMalfa, President, TCL Consulting

Tom LaMalfa is a 35-plus-year veteran mortgage-market analyst and researcher. He has done pioneering work in the areas of secondary markets, wholesale mortgage banking, mortgage brokerages, financial benchmarking and GSE reform. He may be reached by e-mail at Tom.LaMalfa@gmail.com.