The government-sponsored enterprises' (GSEs') move towards single security, the Federal Housing Administration's (FHA's) credit box changes, and the supply of homes available for sale are three trends that will likely shape the mortgage market in 2019 and beyond, according to the Urban Institute's latest Monthly Chartbook.
The GSEs' Move Towards UMBS
While the nonagency share of mortgage securitizations has increased gradually over the years, from 1.8 percent in 2016 to 4.4 percent in 2018, it has seen an uptick since February 2019, inching upwards to 7.15 percent, the report revealed. Nonagency securitization volume totaled $95.2 billion for 2018, a 41 percent increase over 2017.
The report said that the Urban Institute would monitor the GSEs' move towards single security after the Federal Housing Finance Agency recently issued the final rule on this move. This move is likely to have a far-reaching impact on the mortgage market in 2019 and beyond, the report indicated.
This initiative will unify Fannie Mae and Freddie Mac’s currently separate mortgage-backed securities (MBS) into a single, comingled security, called unified mortgage-backed security (UMBS). The final rule requires the GSEs to align their policies, programs, and practices that can impact cash-flows to holders of to-be-announced TBA-eligible MBS. "The market had anticipated these actions, and the price differential between Fannie and Freddie securities had converged some time ago; prior to discussions on the UMBS, Freddie Mac needed to subsidize its security to the detriment of taxpayers," the report stated. How these UMBS, which go live on June 3, trade, will shape the MBS market.
The Chartbook also indicated that the volume of Alt-A and subprime securitization showed the largest growth within the private label securitization (PLS) market with subprime securitizations more than doubling and Alt-A securitizations more than quadrupling from 2017 to 2018. This indicated a distinct "change in the mix" of PLS, the report indicated.
FHA's Credit Box Announcement
The second factor that is likely to impact borrowers and lenders is the FHA's changes to its credit box. The recent announcement is aimed at mitigating FHA's concerns about endorsing mortgages with higher risk characteristics.
One of the key changes announced by the FHA is to refer certain higher-risk mortgages for manual underwriting, which is more labor intensive and costly for lenders. According to the report, while it is too early to tell whether this will discourage lenders from originating the affected mortgages and to what degree, the Urban Institute will be "monitoring the credit characteristics of new FHA originations to identify the impact of this change to credit availability."
The Issue With Housing Supply
Finally, even as the first lien origination volume for the full year of 2018 finished at $1.63 trillion, down from $1.81 trillion in 2017, a recent pullback in rates, the start of the homebuying season, and a continued strong economy are likely to see the demand for homes to pick up again. However, the report indicated that housing supply has been trending downwards throughout 2018 and though it increased month over month in February, inventory was still lower than the previous years. It, therefore, remains to be seen "whether months supply will continue its downward trend in 2019" and how that would impact the demand for homes.
Click here to read the full chartbook.