How a liquidity crunch will shape the secondary mortgage market in 2019

Liquidity, products and pricing are the main concerns for the secondary mortgage market in 2019. Originators depend on all three to make that business tick and there could be some surprises — both pleasant and unpleasant — that shape the mortgage business next year.

Loan performance is another factor that will influence securitization trends.

"The credit quality of new mortgages will remain solid in the coming year on the back of healthy borrower metrics and economic conditions," Moody's Investors Service analyst Max Sauray said in a press release. "Nevertheless, as the credit cycle matures, we expect some weaknesses that have emerged in recent years to worsen slightly in 2019."

There are already concerns on the effect of lower credit quality characteristics seen in expanded prime securitizations — those with a larger percentage of borrowers with credit scores under 700 — completed over the last two years compared with other post-2010 prime jumbo deals, Moody's said.

Here's a look at eight predictions for the secondary mortgage market in 2019.

Because fewer loans are being originated, "there's going to be a lot less units looking for liquidity," said former Ginnie Mae President Joe Murin. "That's going to have an impact on the secondary market. Those buyers are probably going to bid up a little for fewer units."

Ginnie Mae has been concerned about high prepayment speeds for cash out refis of Veterans Affairs mortgages. Rising mortgage rates "naturally should slow down prepays to some degree. And the question is going to be is to whether or not the secondary market will go back to paying up a little bit for higher note rates that they believe will not payoff as quickly as they have historically?"

Lenders "are already starting to see the early stages of liquidity starting to get tight," said Grant Moon, CEO of Home Captain. "Originators are already feeling the plunge dealing with refinancings going down. It's just creating a little bit more of a crunch because now they're getting it on the customer acquisition side, that is becoming more challenging, and then on the liquidity side is becoming more challenging as well."

Secondary market pricing compression will lead loan officers to switch shops, said Jeff Bode, chairman, CEO and president of Mid America Mortgage. "The number of phone calls I've been getting recently from origination channels that are looking to find a new solution has just been increasing at a pretty dramatic rate. Something tells me we'll have to have some consolidation before the margins widen, but maybe that's starting. Production groups are trying to shop themselves, just fear of survival, [looking to] weather the storm."

There will be a return of nonconventional products into the marketplace, such as loans with 40-year amortization schedules as well as interest-only mortgages, said John Vong, president of ComplianceEase. "In order for the capital markets to successfully securitize they need to have enough margins because they still have expenses for due diligence, rating agency fees and credit enhancement fees. That's why for the last few years, our MBS have not been really high, because there isn't enough margin for them. If the rate is high enough, there's margin for these kind of nonconventional products going into the market."

Securitizations of non-qualified mortgages "will continue to increase at an exponential rate correlating to the increase in origination volume," said Lauren Hedvat, managing director of Angel Oak Capital Advisors. More consumers are becoming aware of non-QM product options coming to market; at Angel Oak, originations are expected to double. "We know 2018 will end around the $12 billion mark in securitization volume and next year it could be around the low $20 billion level," she said.

The risk-related spread between the yield on the 10-year Treasuries and mortgages should continue to narrow, said Andrew Weinberg, principal of mortgage broker Silver Fin. The secondary market demands this premium for dealing with the risk of an individual borrower. As interest rates dropped, that premium didn't follow. But now "there's a fair amount of money looking for yield, looking for a return. And the more money that's chasing the market, that pushes the premium down lower."

"With the appointment of Mark Calabria to be the new head of FHFA, we need to be prepared for a lessening of the GSE's role in the mortgage market," said Patrick Stone, executive chairman of Williston Financial Group. "If he is approved, I believe that we will see, at a minimum, a lowering of their loan limits and quite possibly meaningful efforts to significantly reduce their role in promoting home ownership."

"In 2019 I expect that proprietary reverse mortgage production will grow to surpass Home Equity Conversion Mortgage origination, with the secondary securitization of private reverse mortgages growing as a result," said ReverseVision President and CEO John Button. Proprietary reverse mortgages represent between 11% and 14% of the loans closed recently in RV Exchange, but those loans have 45% to 48% of the initial unpaid principal balance. With some modest growth, "more reverse loans — by value — will be originated than HECMs in the next few quarters," said Button.