Deb Jones on why 2024 could be a ‘transition year’

I think what’s unique about this cycle versus many others, is that we’ve had a very rapid rise in interest rates, although they have come back down off of highs of late, and then we have house price appreciation due to the shortage of inventory.

I know we keep hearing that and talking about it, but that’s because it is a real conundrum related to affordability for everybody but particularly for underserved markets. That’s really difficult with inflation and inventory keeping the house prices up as monetary policymakers strive to temper overall economic inflation.

I think this will carry through into 2024 to some degree but it does feel like the steam is being let out of the market in terms of the Treasury yields coming down. The Fed looks like it could possibly do some easing next year but I don’t think they’ll undo it too quickly because they don’t want to overcorrect.

And I think they’ve done it effectively so far. So I think 2024 will be a transition year where we could see some of the higher rate vintages refinance. I would not say there’s a refinancing boom in our forecast. We’ve had a very fast rise in rates in a short period of time, so the late 2022 and 2023 vintages could see some heavy refinancing but I don’t call that a widespread boom. 

The real question is what does the purchase market look like? Because refinancing will come and go to limited degrees. The purchase market is still looking at where there’s inventory and affordability even if rates come back down. By 2025 I think we might normalize some more as we hopefully get some more inventory in the market.

I do. If they’re passed as presented, the cost of capital will go up and it will have a downstream impact to mortgage costs for consumers and even to business-to-business players like warehouse lenders and investors in mortgage servicing rights. I know the industry is pushing very, very hard to call out the bank capital proposal’s double counting of the operational cost of capital, the [mortgage servicing rights] moving back to the Tier 1 Capital threshold, the 15% aggregate limit and risk weighted assets increases without consideration for mortgage insurance.

It’s interesting that you bring it up, because I think as you go through these cycles you end up testing a lot of the different tools in your toolkit. In this market it may more be a question of what the credit-risk transfer mechanism can do to perhaps help with the regulatory capital component for banks as far as optimizing metrics and returns. The CRTs may be a lever that is revisited, not necessarily to reduce credit risk directly, perhaps, but more for capital management of those components.

The one issue that stood out that the committee, as part of a broader industry effort, resolved effectively was the concern about the Federal Housing Finance Agency’s use of the debt-to-income ratio as a pricing differentiator for mortgages purchased by the government-sponsored enterprises. I was extremely engaged with MBA and other trade organizations in terms of sharing what the impact to the customer would be.

While the industry understood the intent in terms of the capital management regime at the GSEs, its interaction with TRID and some of the things that come with that in terms of redisclosure made it unworkable. The groups used a lot of data and analytics. They conducted an operational evaluation of how it could be detrimental and costly to consumers and lenders, even if you were to figure out the operational way to handle it.

We were able to work through that effectively with the FHFA. They were able to partner with us effectively in terms of accepting the feedback and trying to do the right thing.

It’s kind of a sidebar discussion in terms of should we be really refocusing qualification with something instead of debt-to-income in isolation, such as residual income in combination with DTI. There has been some effort in that space with some of the underwriting guidelines coming out of the GSEs. Certainly, the VA has used residual income in their underwriting but they have DTI considerations too.

So that’s behind us now and I think what’s ahead is the Basel III end game proposal, because that is What’s ahead is the Basel III end game proposal, because that is a systemic risk to the lenders, whether you’re a bank or an independent mortgage banker, in terms of the cost of business. It means banks may be focusing on other asset classes, depending on the cost of capital for mortgages, MSRs and warehouse lines.

That could challenge the independent mortgage bankers and everybody will build it into costs. I’m not saying it puts anybody out of business, but it could make mortgages less liquid. It may make them more costly with that cost going back to the consumer at a time when the whole country is focused on affordability.

It’s especially tough for portfolio lenders who are trying to fund affordability products and hold them on their balance sheet. Low down payment programs become more punitive than ever and increase the cost to the consumer. Banks may not want to invest in those loans and then the GSEs and mortgage insurers may get a disproportionate share of higher risk affordable paper and may end up struggling with their capital. [The GSEs’] affordable products are subsidized by non-mission critical products that may be impacted by migrating to a potentially more competitive private market bid for [Fannie Mae and Freddie Mac-eligible] loans.

The other critical focus will be on the FHFA’s credit score model where there is a lot of discovery of data, cost-benefit analysis and a massive coordination to implement, yet to be figured out. This project should look and feel similar to the LIBOR/SOFR transition. I’m not completely sold that the intended results have been fully proven and are worth the effort. I commend the FHFA for taking this forward with input from the industry.

There isn’t a lot of coordination between the agencies and the financial regulators and you can somewhat understand why because they’re coming at it from different angles in terms of a regulatory or investor or a regulatory risk management perspective.

When there are independent changes designed to better manage risk for the financial system, sometimes it can create a lot of unintended consequences…

Look at what happened in 2020 during the pandemic with some of the [independent mortgage bankers’] liquidity challenges around advancing on loans that went into forbearance. Nonbanks needed much more capital for their warehouse lines because they’re required to advance funds when borrowers aren’t paying or to leverage Ginnie Mae’s early buyout program. 

Alanna McCargo is doing a great job at Ginnie Mae, in my opinion. They are trying to address how they can support the system instead of penalizing the system. Yes, they need to increase capital requirements. The independents aren’t banks, so there should be different capital requirements, but there are other solutions in addition to increased capital requirements, such as other loss mitigation tools, advancing support programs and other cash management solutions.

Yes, and I think that’s why Ginnie is focusing on nonbanks and thinking what they can do programmatically to help. 

It is interesting that an independent mortgage banker will be impacted by not only the Ginnie capital requirements but also the GSEs’ counterparty and capital requirements. There also [could] be an indirect impact from the banks’ capital [if it’s] increased due to [the] Basel III [endgame], specifically MSRs and warehouse lines.

So again, the costs keep going up and everybody is going to have to pass some of that along to the consumer. Then there are the high prices on the homes from the inventory constraints. Is the volume going to be there? Because there’s a scale issue here in addition to one around affordability. You have to ask yourself, are you going to get the volume that you need to do business and have scale?

It’s heartening to see a greater number of women in senior and leadership positions in policy and at banks and they are all strong capable people making real change. I find most of these newer leaders are listening and accepting input…