After months of low rates, there have recently been shocks to the bond market. HousingWire recently sat down with Scott Happ, president of Secondary Marketing Technologies for Black Knight, to discuss the impact this has on mortgage originators and investors.
HousingWire: How are recent shocks to the bond market impacting the industry’s housing recovery?
Scott Happ: After roughly nine months of extraordinarily low and stable rates, we’ve seen a significant sell-off in the bond market resulting from the anticipated end of the pandemic and improving economic activity. The combination of a rise in inflationary expectations and higher real rates of return has caused mortgage rates to increase by about 0.5% since year-end. However, the key point is that rates are still extraordinarily low, and I do not expect this modest increase in rates to have a noticeably adverse effect on the housing market. Of course, at current rates, there are now somewhat fewer refinance candidates than there were a couple of months ago.
HW: How does this, in turn, impact mortgage originators and investors?
SH: I think both originators and investors understand that the high level of refinance volume we’ve seen over the past year will subside at some point, and they are already thinking about how to compensate for that change, whether it occurs suddenly or gradually. The housing market is robust, so one strategy will be to shift resources to the purchase market. Of course, as anyone who has been through a mortgage cycle knows, at some point refinance activity will wane, and the industry will face a period of excess capacity. Regardless of the environment, we think the advantage will go to those with robust data assets and the analytical skills to fine-tune pricing and production strategies with extraordinary granularity.
HW: What can originators and investors do to prepare for any future market volatility?
SH: During the market disruption last March, we observed that firms with both resiliency and nimbleness built into their models were better able to identify, withstand and pivot as conditions changed. These are the type of preparations that require forethought and commitment before calamity or unexpected changes strike. A big part of that is diversification of counter-party risk, for example, firms that hedge with TBAs benefitted from having multiple primary and broker-dealer relationships. Firms that had established multiple loan sale execution strategies, including agency sales, securitization and servicing retain/release flexibility also fared better. With these relationships in place, it’s critical to gain real-time insights from vast amounts of data across all these counterparties for optimum utilization and positive impact to the bottom line.
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Author: Housing Wire