The residential mortgage-backed securities (RMBS) market took a beating in 2022, nearly stalling as the year came to an end — on the heels of interest rates jumping more than 3 percentage points over the first half of 2022.
That dramatic rate volatility wreaked havoc on spreads and RMBS deal execution — and created cash-flow challenges for many lenders that rely on securitization as a liquidity outlet. As we turn the corner into 2023, however, the landscape so far looks brighter for the RMBS market.
Though still a continuing factor, rate volatility so far this year has calmed considerably compared with last year’s huge rate surge. In addition, a major decline in mortgage originations — a byproduct of higher interest rates — has reduced overall RMBS supply, which market observers say provides a lift to even low-coupon securitization deals.
Those tailwinds in the RMBS market, also referred to as the private-label securities (PLS) market, are providing a boost to both prime jumbo and non-QM (or nonprime) issuance so far this year, market data shows.
“The securitizations that printed in January priced at meaningfully tighter spreads than we’ve seen in some time,” states a recent report from the loan-exchange platform MAXEX. “Improved securitization economics also allowed issuers to improve pricing significantly.
“…Three prime jumbo RMBS deals priced in January for a total volume of $1.15 billion. These were the first prime jumbo securitizations since October 2022 and [it was] the first multi-issuance month since June 2022.”
In addition, according to bond-rating reports, an additional three prime jumbo RMBS deals are in the works this month, as of Feb. 21, backed by loan pools valued in total at $1.1 billion.
Better days in non-QM
The non-QM side of the PLS market is off to an equally good start in 2023, relative to how it finished 2022. A review of available bond-rating reports shows that a total of 15 non-QM PLS deals were in the works as of Feb. 21, backed by loan collateral valued in total at nearly $6 billion. Those non-QM offerings include 13 securitizations involving a mix of owner-occupied and investment properties, plus two deals involving a mix of performing and nonperforming loan collateral.
MAXEX reports that non-QM securitizations (which it calls expanded credit) last year declined steadily month over month starting in late summer — that is until January of this year, which produced the highest total non-QM PLS issuance since August 2022.
“The way spreads and rates have moved incentivizes originators, particularly those who backlogged really low-coupon loans, to come through with deals,” said Ben Hunsaker, a portfolio manager focused on securitized credit for California-based Beach Point Capital Management. “This gives some of the lenders with backlogs of those low-coupon loans an exit strategy, and it frees up capital for that origination ecosystem.
“They’re probably not going to lose nearly as much money as they thought coming into the new year in terms of where they valued [those loans] on their books at the end of Q4, so it’s an unambiguous positive for them. And if you have the critical mass for a new deal with the prevailing coupons, let’s say at rates of 7% plus, you would be highly incentivized to issue those deals today because bond buyers love it.”
Keith Lind, CEO of California-based non-QM lender Acra Lending, stressed that even though market conditions overall appear to be headed toward improvement, that doesn’t mean all securitization deals are profitable for lenders even now. He said non-QM securitization deals in this rate environment still need to be in the “low 7% range to break even.”
For deals backed by loan collateral with coupons in the low 5% range, Lind said, “You’re likely talking about a 5-to-10-point loss, so you’re crystalizing a loss there.”
Lind stressed that Acra has stayed on the right end of that rate curve by raising its rates early and fast.
“We’re locking [loans at] about an 8.25% to 8.5% coupon today,” Lind said in a recent interview. “A year ago, we were at like a 4.75% coupon, and we were the first mover [on rates]. We took a lot of flak for that, but it was the right move.
“That preserved our year on our balance sheet, and we were actually profitable in 2022 because we were very decisive in taking rates up.”
Acra at this point does not securitize its own loans but rather sells them on the whole-loan market servicing-released. Some of those loans are purchased by aggregators that do securitize them along with loans from other lenders. Despite the continuing dour mortgage-origination environment and ongoing uncertainty over interest rates — as the Federal Reserve continues to inch up its benchmark rate to battle still-persistent inflation — Lind sees some prospects for optimism about the mortgage market in the year ahead.
“There’s more tailwinds looking forward into 2023 than headwinds for the non-QM market,” Lind added. “So, we’re fairly bullish moving forward.”
An analysis of bond-rating reports for 2023 PLS offerings in the works through Feb. 21 shows that for prime jumbo deals, the weighted average coupon (WAC) for the loan pools ranged between 3.8% to 5.9% — with the fresher collateral at the higher end of the range.
For the non-QM deals in the pipeline for 2023 through the same date, the WACs range from 4.87% to 8.7%, bond-rating reports show. Non-QM rates tend to be about 1.5 percentage points above the prevailing interest rate, in part because of the added risk the loans entail. As of Feb. 16, according to Freddie Mac, the interest rate for a 30-year-fixed mortgage stood at 6.32%.
A lighter RMBS pipeline
Although the PLS market appears to be getting its sea legs back so far in 2023 as fresher, higher-rate collateral is finally starting to hit the market, volume is still projected to be down significantly from 2022.
Kroll Bond Rating Agency (KBRA) in a PLS report released late last year forecast that overall PLS issuance in 2023 — which it defines as prime, nonprime and credit-risk transfer offerings — is expected to come in at about $61 billion, down 40% year-over-year. An analysis of PLS deals based on multiple bond-rating agency reports shows that this year, through Feb. 21, some 21 PLS deals are in the pipeline valued at about $8.2 billion. Over the same period in 2022, KBRA tracked a total of 31 PLS deals valued at $16.7. billion — an indication of just how much loan-origination volume is off between last year and this year.
That reduced RMBS supply, however, can be good for lenders still in a position to securitize loans.
“Volumes have significantly contracted, so all of a sudden there’s less secondary volume in general,” said Sean Banerjee, co-founder and CEO of ORSNN, a Seattle-based fintech start-up operates a cloud-based electronic whole-loan trading platform. “And when that happens, the coupons of yesterday that are below prevailing interest rates become more valuable because there’s a lack of origination volume, and banks and [other investors] still need earning assets.”
Agency mortgage-backed securities (MBS) volume also is down significantly for similar rate-driven reasons. Although the Federal Reserve’s reduced role since last year as a buyer of agency MBS mitigates the upward pricing pressure created by the supply reduction, given the Fed’s outsized role in recent years as a purchaser of agency MBS assets.
Another bright spot for the RMBS market, according to Mark Fontanilla, a consultant in global structured finance for rating agency DBRS Morningstar, is that significant home-price appreciation (HPA) remains embedded in existing loan collateral, even as home-price growth dips or declines in some regions.
“The most real recent [loan] vintages don’t have as much HPA upside at this point in the cycle versus seasoned deals, which have substantial built up HPA,” Fontanilla said during a recent webinar focused on the PLS market. “… As far as the significant home-price appreciation that’s inherent in almost every RMBS sector, however, that bodes well.
“Given the HPA built-up over the past couple of years,” he added, “there’s been more originator and borrower interest in this side of the market” in terms of the future potential for home-equity lending and related securitizations.
Roelof Slump, managing director of structured finance operational risk at Fitch Ratings, agrees that there is likely to be more activity in the year ahead with respect to securitizations backed by home-equity loans — second liens and HELOCs (home-equity lines of credit).
“Those borrowers who have 3% firsts [first mortgages] who are happy with their homes and happy with their mortgages at that rate may find over time there’s a need or opportunity to take advantage of home equity,” he said. “Does that mean there will be many large issuances?
“I’m not sure, but I think there’s going to be some of that activity. But traditional prime is not dead either, so I think it will be mixed [this year] in terms of the types of [deals] that the rating agencies and investors see, but I think it will be an interesting and multifaceted year.”
Slump hedged his forecast by adding that given the still uncertain mortgage-finance outlook, a quarter-by-quarter assessment is still necessary, “but I think the activity is good right now.”
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Opinion: Five keys to effective communication with borrowers
Any mortgage lender will tell you that clear and rapid borrower communication is critical to effective customer care. Homebuyers think about their purchase journey 24/7, and any delay in communication tends to leave the borrower worried that something has gone wrong or that they are missing some key piece of information.
Homebuyers have seemingly countless tasks and responsibilities in the process of purchasing a home and obtaining a mortgage. Now, consider the fact that these customers are in foreign territory. They simply do not know how to navigate the mortgage terrain without clear guidance.
Consider, for example, just one aspect of purchasing a new home in 2023: obtaining mortgage insurance. Most borrowers don’t even know what mortgage insurance is, let alone how much it adds to their cost. Then try “selling” mortgage insurance to someone who is required to pay for it but who receives zero benefits from that costly investment.
The same holds true for a borrower who is tasked with redefining a personal monthly budget. That is a conversation that rarely comes up with a loan officer, and yet the consideration of higher monthly costs weighs heavily on the customer’s mind. What compromises will they have to introduce to their lifestyle? What are the unexpected new costs? Can they still enjoy their lives when they are saddled with a costly mortgage payment?
These are considerations that a customer carries privately and adds to their mental strain. How much additional stress is introduced in the absence of quality communication from their lender?
Lenders must place a premium on both the speed and quality of their communication. Below are five strategies to help any lender accomplish that goal.
Key Communication Strategy #1: Update calls are sales calls
The objective for the lender is to sustain the positive emotional state of the customer throughout the entire purchase transaction. A customer’s emotional altitude is a measurement of their positive emotional engagement throughout the process. At the time of purchase, that emotional altitude is elevated, but after the contract is written and the mortgage is applied for, the emotional altitude tends to wane.
For that reason, every update call must be seen first and foremost as a sales call. The updates should represent an exciting and emotionally elevated conversation with the customer.
Start with a comfortable chat about their life, not about their loan. Congratulate them and encourage them at every opportunity. Keep the overall strategy in mind, and that is to elevate the emotional altitude.
That can only happen when the lender and the builder are on the same page. Anthony Grasst, national sales director at Homebridge Financial, suggests that communication with the builder sales rep is critical. “Lenders must integrate into the sales process. They can no longer be outside or ancillary services after the buying decisions get made.”
Key Communication Strategy #2: The borrower goes first
Borrowers are thinking about their purchase process all the time. There is always a question on their mind and they always have a concern they are processing. You may have something important to communicate in an update call, but you will not get the benefit of their full attention until they first feel heard. For this reason, keep this principle in mind during any update call: the borrower goes first. The customer will respond better to your updates if they’ve had a chance to share their concerns first.
You can say to a customer, “I’ve got some things that I want to update you on, but why don’t you go first and tell me anything that’s on your mind and any concerns that you might have.”
Key Communication Strategy #3: Update without updates
Your customer desires constant and continued communication and updates. But sometimes there are no updates to offer.
Call them anyway. Call them to simply say, “I don’t have anything new to add, but I want to check and see what questions you have and any concerns that you might be dealing with right now.”
The fact is that proactive communication, even with no “new news,” keeps the customer from experiencing unnecessary anxiety.
Key Communication Strategy #4: Making promises you can beat
You don’t get credit for meeting expectations. You only get credit for exceeding expectations. When you only meet the expectations you set, you are rewarded with customer satisfaction. But when you exceed those promises, you get customer elation — and that should be our goal. For that reason I offer this advice: only make promises that you know you can beat. Not meet. Beat.
Think about a restaurant host telling you that it’s going to be 30 minutes before you are sat. If they seat you exactly at 30 minutes, your response is, “well, that’s what they said they were going to do. I’m satisfied.” If they seat you at 32 minutes you say, “They’re late; I’m not happy.” But if they seat you in 20 minutes, you’re delighted that they exceeded your expectations.
It’s the same thing for you. Only make promises that you know you can beat. If you promise to call them by 4 p.m., call them by 2 p.m. If you expect something done by Wednesday, promise Thursday.
Key Communication Strategy #5: Speed is your secret weapon
Borrowers are experts when it comes to obsessing over their concerns. They think about those issues every waking hour. When they ask a question of their lender, they can’t truly rest until they have an answer.
Speed in buyer communication is absolutely critical. Do not let an extended amount of time go by without getting the buyer at least some information. It’s better to give part of the answer to their question now while you’re gathering more intel.
You can always say to the customer, “Let me address what I can right now, and then I’ll do some homework and I will reach back out to you by four today.” Of course, that means that you’ll be reaching out to them by two today.
Grasst puts it this way. “Respond immediately to any buyer inquiry — by text or by call. Fast responses convey importance and value to the buyer.”
Buying a home and obtaining a mortgage is destined to create numerous stress points in the buyer’s mind. Effective communication can ease so much of that stress and provide needed cognitive comfort. Empathy for the customer’s emotional journey is critical to first understanding the experience and then responding appropriately. Put yourself in your customer’s shoes. Effective and speedy communication is what you would value more than anything else.
Your borrower is going through a stressful and emotional experience. Whatever you can do to increase the speed and the quality of your communication will make the purchase experience far more enjoyable.
Jeff Shores is the author of, “From Contract to Close,” and founder of Shores Consulting.
This piece was originally published in the February/March 2023 issue of HousingWire Magazine. To read the full issue, click here.
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What Is A Blanket Mortgage And Does It Make Sense To Have?
A blanket mortgage is useful for real estate investors with a large real estate portfolio. Also called a blanket loan, the mortgage consolidates several separate loans into a single mortgage. For many experienced investors, having one loan payment makes juggling several mortgage payments and interest rates more straightforward.
However, arranging a blanket mortgage loan is not always the best financing option. For example, loans are harder to secure. And putting individual mortgages under one “blanket” can put all properties in the portfolio at risk.
When does it make financial sense to put separate mortgage loans into a single loan? Are there situations when it is best to keep individual loans separate and not consolidate them into an entire mortgage?
This article explores the pros and cons of using blanket loan refinance to manage multiple properties in a real estate portfolio.
Definition of Blanket Mortgage
Also called a portfolio loan, a blanket mortgage is a single loan covering two or more properties. The simplified process lets you make one monthly payment for the entire loan, meaning managing multiple properties is easier. Additionally, you can buy, hold, or sell properties without triggering a due-on-sale clause.
There are a few nuances of blanket loans not associated with traditional mortgages.
For example, the mortgage has a release clause, allowing you to sell one property without having to pay off the loan. Additionally, the blanket mortgage lender attaches a lien against each property covered by the loan. Therefore, defaulting on a mortgage could result in foreclosure on all properties secured in the loan.
Blanket Mortgage Pros
Knowing the pros and cons of blank mortgages can help you make smart real estate investment choices. Let’s look at four reasons why consolidating several mortgages can make financial sense.
Blanket loans simplify paperwork
An attractive feature of blanket mortgage loans is their simplicity. There is no lengthy loan application process every time to decide to buy an investment property. The blanket loan application process involves only one credit check and asset verification. And when you sell a property, the release clause allows you to make a partial repayment.
Of course, keeping track of one monthly mortgage payment is simpler than managing several.
Better negotiating loan terms
A positive aspect of blanket loans is that you have the leverage to negotiate better interest rates and terms. For example, say you must take out five or six conventional mortgages. In that case, you have little negotiating power with the lender. However, the combined amount looks more attractive to a lender.
Another advantage is that you only have a single interest rate to deal with. Also, lenders typically offer more favorable interest rates to investors who want to consolidate conventional mortgages into larger loans.
Release more cash to invest
Negotiating better loan terms and interest rates means one thing — you have more cash to invest. Here are some ways how a blanket mortgage can give you more money for investing:
Tap into equity to avoid down payments
Do you want to buy real estate with no money down? If so, a blanket loan makes that possible. When buying a property with a blanket mortgage, you do not have to make a down payment — typically 20% for real estate investors. Instead, you offer equity from existing properties as collateral.
Blanket Mortgage Cons
Despite their advantages, blanket mortgages may not always be the best choice. Here are some disadvantages of consolidating several loans into a single one in real estate investing.
Higher down payments
The initial down payment to secure a blanket mortgage is significantly higher than a regular mortgage. This is because lenders are at more financial risk with these consolidated loans and require more cash upfront before financing the loan. Even if the percentage is the same, the down payment will still be larger.
Some real estate investors use short-term loans or swing loans to secure the mortgage. Therefore, there are more financial obligations with blanket loans.
All properties are collateral
A serious consideration of a blanket-type mortgage is that all the blanket loan properties are collateral. Therefore, defaulting on a single payment could put your entire real estate portfolio at risk. On the other hand, you only risk losing one asset if you have a conventional loan on a single property and miss a payment.
Loan terms are shorter
It’s not uncommon for blanket real estate loans to be amortized over ten to 15 years, unlike the typical 30 years for a traditional home loan. Additionally, some “portfolio lenders” structure the loans with balloon payments. This requires that you pay off the entire mortgage at the end of the term.
It’s good to remember that blanket mortgages are always meant to be short-term loans.
More stringent requirements to qualify
Fewer lenders offer blanket mortgage loans, and qualifying for them is harder. You must have an excellent credit score and large cash reserves to make a down payment — sometimes up to 50% of the loan value. A higher loan-to-value (LTV) is also necessary to refinance several loans into one.
Guidelines for blanket loans change from state to state
Each state has its own blanket real estate loan regulations. Therefore, if you own real estate investments in two or more states, you will need a separate blanket loan for each state.
Examples of a Blanket Mortgage
Here are a few examples of how real estate investors can use a blanket mortgage to grow their businesses and expand their portfolios.
Buying an entire portfolio: Say you want to buy an entire real estate portfolio of properties. Then, instead of taking out different mortgages for each property, you can find a lender offering “portfolio mortgages.”
Loans for buy-an-hold investors: Suppose an investor has a traditional mortgage loan on a property worth $170,000 with a $70,000 mortgage. However, the investor decides to buy another investment property for $170,000. Rather than come up with a 20% down payment of $34,000, they take out a blanket loan, using equity from the existing property.
Investors who flip houses: A house flipper can buy several rehab properties in a single blanket loan. After flipping the house, they only have to make a partial repayment when selling each property. They can then buy another fixer-upper under the blanket loan.
How to Get a Blanket Mortgage
Getting a blanket mortgage can be tricky for startup investors. Commercial lenders typically offer blanket loans to seasoned investors with plenty of cash, sizeable assets, and a solid investment portfolio.
Here are a few facts to remember when considering consolidating several mortgages into a single one:
How to Find Blanket Mortgage Lenders
Conventional mortgage lenders don’t offer blanket mortgages. Therefore, you should search out commercial lender brokers and bankers for the loan. Look for lenders who specialize in real estate investing. However, some local community banks may offer blanket mortgages to real estate developers and investors.
Conclusion
While a blanket mortgage is not for every investor, it is a useful type of financing tool for investors with several properties in their portfolio. The blanket loans offer more access to funds through cash-out refinancing and equity loans, and only one monthly payment is required. However, the loans are harder to secure, and they put all real estate properties in the portfolio at risk if you default on mortgage payments.
Find a Lender in Minutes
A great deal doesn’t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Higher rates flip the homebuilders’ fortunes (again)
While the homebuilders weren’t surprised by the better-than-estimated new home sales report released Friday, some people were a bit shocked. But the forward-looking purchase application data was getting better from Nov. 9 up until the early part of February as mortgage rates fell from 7.37% to 5.99%. Now, of course, that has all changed quickly.
On CNBC Friday morning, I highlighted that whatever data stabilization we had at 5.99%, it’s now gone in the blink of an eye.
The homebuilders are crafty people (pun intended). They move homes like they are commodities, not as a secured form of shelter they live in. They don’t ever have to have the conversation about how low their total payment is in the new home they’re buying, unlike some of their buyers (which explains higher cancellation rates).
To combat higher mortgage rates, builders have been cutting prices and buying down rates to move product. They still have a lot of work to do here, so we shouldn’t expect anything good to come from the housing permits side of the economy in 2023.
New home sales
From Census: Sales of new single-family houses in January 2023 were at a seasonally adjusted annual rate of 670,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.2 percent (±20.4 percent)* above the revised December rate of 625,000, but is 19.4 percent (±13.1 percent) below the January 2022 estimate of 831,000.
As I have stressed for months, the new home sales levels are historically low and don’t account for the cancellation rate. Just like in the existing home sales market, when sales are low, anything positive on the rate side can move the market in a positive direction.
This goes into my low housing bar theme for 2023 and why we need context with sales data. If sales are working from an elevated number, like what we saw from 2003-2005, it’s a different subject altogether. As we can see in the chart below, we are still below the recession levels of 2000 and really trending at 1996 levels. And we have a lot more workers now than we did then.
I wouldn’t read too much into the fact that this new home sales report beat estimates, but I would say that in the future, if mortgage rates get back toward 6%, the homebuilders have creative ways to sell their homes that the existing home seller might not be inclined to do.
Homebuilders’ for-sale inventory and months’ supply
The seasonally-adjusted estimate of new houses for sale at the end of January was 439,000. This represents a supply of 7.9 months at the current sales rate.
This is a positive trend: the homebuilders are working through their supply and while their monthly supply levels are still too high to issue new permits, we are making progress here.
However, some context is needed here as well. Here is a breakdown of the supply data:
One of the most incorrect parts of the housing inventory story lately is that we have a record number of homes under construction and that the builders are about to flood the housing market with a massive number of homes on the scale of 2008. However, this isn’t how inventory grows in America.
The majority of inventory comes from the existing home sales market and if you compare it to 2008, back then we didn’t even have 200,000 homes available for sale and currently we are at 68,000.
When we look at active listings today, we are still at 980,000, near all-time lows, even with the recent massive hit to demand. To get more inventory you need more Americans to list their homes.
As we can see with the new listing data, not much is going on here:
For the homebuilders to start building new homes, I have a very simple model. My rule of thumb for anticipating builder behavior is based on the three-month supply average. This has nothing to do with the existing home sales market; this monthly supply data only applies to the new home sales market, and the current nine months are too high for them to issue new permits.
As you can see, the builders still have a lot of work to do before considering a new housing cycle, so the sector is still in a recession while working off the backlog. They’re lucky that active listings are so low, which gives their product more value.
So, all in all, yes, the new home sales beat estimates, but that was in a lower-mortgage-rate world. Now that rates have spiked up almost 1%, we’ll see how much more buydowns homebuilders will need to do to keep this progress going.
Suppose mortgage rates had broken below 5.75%. In that case, we would be having a different conversation today. However, as part of my 2023 forecast, as long as the economy stays firm, I believe the 10-year yield range should be between 3.21%-4.25%, which means rates between 5.75%-7.25%. So far as the economic data has stayed firm, the bond yield range looks right to me.
The housing market story is about where the 10-year yield is going. Credit standards are still looking great, and we don’t have to worry about credit getting so tight that it will kill demand, as we saw from 2005 to 2008.
It will be a long grind for homebuilders to get the current stock off their books. However, we have seen what can happen when mortgage rates get below 6%, so we need to be patient while the Fed tries to slow the economy down fast enough to bring inflation down.
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LenderLogix launches POS system for small- to mid-sized lenders
LenderLogix, a provider of mortgage automation software and application programming interfaces (APIs), has launched LiteSpeed, a white-label streamlined point-of-sale (POS) system that serves small- to mid-sized mortgage lenders.
Patrick O’Brien, the founder and CEO of LenderLogix, said the product was designed in response to the need for a more efficient and cost-effective method of managing the loan application process.
“Many of the POS platforms on the market today function as a second loan origination system in disguise in terms of features, architecture and required upkeep, effectively putting them out of reach for the majority of the market,” O’Brien said in a prepared statement. “…So we created LiteSpeed to deliver pragmatic POS functionality at a price point that makes sense for the average mortgage lender.”
According to the company, LiteSpeed provides lenders with a POS functionality that can compete in today’s market at a lower cost and investment support for its implementation.
The platform uses “animated iconography and dynamic messaging” to help borrowers navigate through singular, auto-advancing application questions, according to the company. When the application is complete, the loan originators give borrowers a customized needs list and a secure document upload link.
“As a result of this early engagement, mortgage lenders can increase lead capture and conversions while delivering a consistent brand identity across branches and teams – all while providing executives with more granular insight into marketing and sales performance,” O’Brien said.
The company was featured in HousingWire’s Tech 100 in 2022. Its other products include QuickQual, which is used by lenders in 42 states. QuickQual is an adjustable pre-approval letter that gives payment and closing cost scenarios and the option to update agent letters.
Its Fee Chaser integrates with loan origination systems and sends borrowers a one-time use link for them to pay fees securely. Mortgage lenders using this functionality receive more than 50% of their payments within 15 minutes and a minimum of 10% more upfront payments, according to the company.
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The housing industry is on a mortgage rate roller coaster
The mortgage industry has been on a roller coaster ride this year due to a resilient economy. In the span of a month, mortgage rates shot up near 7% after dropping to the low 6%-levels.
“The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist.
The latest economic data, including the job market, consumer spending — which remained robust — and inflation numbers, which displayed unexpected staying power, led investors to bet that the Federal Reserve will continue to raise its federal funds rate through the summer.
Even before these data were released, minutes from the Jan. 31-Feb. 1 Fed officials’ meeting showed that they needed to do more to wrestle rapid inflation back to 2%.
“With inflation still well above the committee’s longer-run goal, participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a path toward 2% is appropriate from a risk management perspective,” the minutes, released on Wednesday, said.
The 10-year Treasury yields, which act as a benchmark for mortgage rates, rose to 3.93% on Wednesday, up from the previous week’s 3.81%.
Following the climb in the 10-year Treasury yield, the Freddie Mac fixed rate for a 30-year loan also continued to rise.
The 30-year fixed-rate mortgage rose again to 6.5% as of February 23, up 18 basis points from the previous week’s 6.32%, Freddie Mac’s latest survey showed. Rates were at 3.89% a year ago this time.
Just about three weeks ago, Freddie Mac’s mortgage rates dropped to 6.09% — despite the Fed’s hawkish tone to keep inflation at a target of 2%.
At HousingWire’s Rate Center, the Optimal Blue data showed rates at 6.64% on Wednesday, up compared to 6.48% the previous week. Mortgage News Daily showed rates were at 6.88% as of Wednesday, up one bps from the previous day.
‘Nobody’s market’
Realtor.com economist Jiayi Xu said that while it’s hard to predict whether the Fed is going to make an aggressive move next month, if companies tighten belts in preparation for a potential economic downturn, it could endanger jobs in the tech industry and service sectors.
“This means that the housing market will continue to be a ‘nobody’s market’ — not friendly to buyers nor to sellers. Mortgage rates are likely to move in the 6% – 7% range over the next few weeks, which continues to pose a significant challenge to affordability,” Xu said.
In turn, potential buyers could opt to stay in the rental market, driving up the already high rental demand, Xu explained.
Higher mortgage rates also make it less appealing for people to list their homes to sell and buy another, Logan Mohtashami, lead analyst at HousingWire, said.
“As we saw after June of last year, when mortgage rates got above 6%, new listing data started to decline year over year and is still falling year over year,” he said.
But for those looking to buy in a rate-rising environment, borrowers are recommended to shop among lenders to find a better rate.
“Our research shows that rate dispersion increases as mortgage rates trend up. This means homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among lenders to find a better rate,” Khater said.
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The Ultimate Guide To Buying A Second Home
There are plenty of reasons to want a second home. Whether you’re making the leap into real estate investing and need a property that can cash flow each month or you just need a place to stay in the summers, second homes are a mainstay in the classic “freedom” lifestyle.
However, buying another property is a serious financial commitment. And if buying a primary home is one of the largest financial transactions you are likely to make, purchasing a second home can be just as large. Therefore, before buying a second home, it makes financial sense to calculate if you can afford the purchase costs and maintenance.
So, whether you want to find the perfect beach getaway, commuter home near a major city, or rental property to start a real estate portfolio, you need the best advice on how to buy a second home.
This article explores the necessary steps to take ownership of a second residential property. You will learn how to choose a location, find financing, and close a deal.
When is a Second Home a Good Investment?
Buying a home in addition to your primary residence has several financial benefits. We’ll list them below.
Cash flow
Renting your second home as a short-term rental during the times you’re not staying there or as a long-term rental is a great way to get started in real estate investing and start building cash flow.
Appreciation
Although the property market experiences ups and downs, general trends show that property values appreciate in the long term. This means you can expect a healthy rate of appreciation over the long run, quietly building your net worth.
Tax benefits
Buying a second home means you have access to several tax benefits, thus reducing how much you owe to the IRS. For example, you may qualify for a mortgage interest deduction or property tax deduction.
However, getting sound financial advice is wise before considering a second home for tax purposes. Property tax laws on real estate investments can change. And depending on the number of days you occupy the additional property, the IRS could consider it a second home or an investment property, each with different tax implications.
How Many Homes Can You Afford?
Before buying a second home, it is crucial to assess your financial situation.
For example, you may need to qualify for a second-home mortgage. Having enough income and savings to cover unexpected expenses is also good. For example, what will you do if you have extended vacancies? Can you still pay the mortgage if interest rates rise? There are also additional expenses to consider with owning a rental property.
Mortgage lender requirements for a second home
Mortgage lenders typically require higher down payments for a second home, higher minimum credit scores, and will give higher interest rates.
It’s recommended that you have a down payment of more than 10% and plenty of cash on hand. There are also many lenders that will require you to live in the property for at least part of the year.
Calculate debt-to-income ratio (DTI) requirements
Mortgage loan approvals always depend on debt-to-income ratio requirements. For example, if you are buying a second home, you will typically need a DTI below 45% to get pre-approved for a second home mortgage.
Here is a quick way to calculate your debt-to-income ratio:
Vacation home vs. investment property
Knowing the difference between having a vacation home or an investment property is crucial. For example, tax benefits, financing, and mortgage options differ depending on your home use.
Generally, a vacation home is one you have for enjoyment purposes or live in the property for ten percent less time than it’s rented. On the other hand, a second home becomes an investment property when tenants occupy it for most of the year.
How to Buy a Second Home
Buying a second home requires the same due diligence and financial calculation as when you bought your primary residence. However, running costs, mortgage options, loan payments, and maintenance can be significantly higher than your current home.
Consider all the costs of buying and owning a second home
It’s vital to crunch the numbers before you commit to buying a second home.
Here are some of the expenses to consider:
Explore your financing options
Successful real estate investing depends on getting the right financing options. But the mortgage qualifications for a second home will be stricter than your current mortgage. Also, loan options depend on specific credit score requirements for investment properties or vacation homes.
A jumbo or conventional loan is the two most common financing options when purchasing a second home.
Get pre-approved for a mortgage
Getting pre-approved for a mortgage early in your real estate investment journey is vital. Preapproval lets you know how much you can afford to offer for a second home. Additionally, the financing process proceeds much faster when closing a real estate deal.
Perform market research for potential housing markets
As with any real estate investment, due diligence is crucial when buying a property home for rental or as a second home. Therefore, you must conduct thorough research on housing markets with solid investment potential.
Here are some top tips on finding the right type of property:
The next step in the house-buying process is to find a local real estate agent to find your ideal second home.
Find a reputable real estate agent
An experienced real estate agent is invaluable when buying a second home. They will cover all bases to scout out the best deals for your needs — which is crucial if you are buying a property in another state. They can also handle the initial negotiations with the seller, saving you travel costs and time.
A good estate agent is still useful even when buying a second property in the local area. This is because they can find the ideal property for your lifestyle requirements. For example, the type of suitable property depends if you plan to buy a second home or investment property. Or do you want to move to your new home and rent your existing property? In these cases, a local real estate agent’s services are vital.
To find a good, qualified real estate agent, use our Agent Finder tool!
Make offers
Once you have found your dream home, it is time to make an offer. You can work out your negotiation strategy and how much to offer with your real estate agent. This includes contingencies in the sale agreement and how much earnest money (down payment) you can afford.
Whether you offer below the listing price or meet the buyer’s price depends on if the house value is fair and how much you want the property. But, again, your real estate agent can guide you through the process.
If the buyer accepts your offer, you then start the process of closing the deal. If the buyer counteroffers, you will have to negotiate how much you are willing to spend.
Close
It can take 30 to 45 days to close on a house. However, it can be longer depending on issues in the mortgage application, home appraisal, and home inspection. During this period, the closing agent carries out all the necessary tasks to transfer property ownership from buyer to seller.
Here are the necessary steps when closing on a property deal:
Conclusion
Buying a second home is an exciting process and can be a wise financial move. However, to ensure the second home fits your lifestyle requirements, if vital to remember the following aspects:
Find a Lender in Minutes
A great deal doesn’t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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A week late, Freddie Mac releases Q4 2022 results
A week after canceling its quarterly earnings results without explanation, Freddie Mac on Wednesday disclosed a net profit of $1.76 billion in the fourth quarter.
That figure was a sequential gain on the $1.3 billion in net income recorded in the third quarter of 2022, though it represented a 36% decline from a year prior.
Executives at the government sponsored enterprise primarily attributed the drop from last year to lower net revenues and a credit reserve build in its single-family business.
Net revenues for the fourth quarter totaled $4.8 billion, down 13% year-over-year, driven by a decline in both non-interest and net interest income. Fourth quarter non-interest income of $200 million was down 70% year-over-year, primarily driven by a decline in net investment gains in both single-family and multifamily. Those net investment gains resulted from lower gains on single-family held-for-sale loans due to lower volumes and on new loan purchases and securitizations in multifamily due to lower volumes and margins.
“In a year with significant volatility and a challenging macroeconomic environment, Freddie Mac made home possible for 2.5 million families, while delivering solid financial results,” Freddie Mac CEO Michael DeVito said in a statement. “Looking ahead, we expect to place even more emphasis on our mission by further advancing our affordable, sustainable, and equitable housing plans without compromising safety and soundness. We expect to accomplish these objectives by leveraging our talented workforce, collaborating with market participants to find new solutions, and continuously working to effectively manage risk. These actions will enable Freddie Mac to continue to build financial strength and stability that is central to fulfilling our mission.”
According to Securities and Exchange filings, net interest income of $4.6 billion decreased 4% year-over-year, primarily driven by lower deferred fee income due to slower prepayments as a result of higher mortgage rates.
Provision for credit losses for the fourth quarter of 2022 came in at $600 million, up from $100 million in the fourth quarter of 2021. This was primarily driven by lower home values, partially offset by lower purchase volumes.
Non-interest expense for the fourth quarter was $20 billion, up $50 million year over year, primarily driven by higher credit enhancement expense due to a higher volume of outstanding credit risk transfer transactions and higher spreads on recent transactions.
In all, the total mortgage portfolio increased 6% year over year to $3.4 trillion, driven by a 7% increase in the single family mortgage portfolio and a 3% increase in the multifamily mortgage portfolio.
At the end of 2022, Freddie Mac had a net worth of $37 billion but was still undercapitalized in its Treasury funding commitment by $140.2 billion.
The government sponsored enterprise reported that it recorded net income of $9.3 billion and comprehensive income of $9 billion for the full year 2022, both of which declined 23% from the prior year.
Its fellow GSE, Fannie Mae, similarly saw its net income sink in 2022. Fannie’s net income fell to $12.9 billion in 2022 as the housing market declined, a steep drop from $22.1 billion in 2021.
Freddie executives on the earnings call Wednesday did not state why the call was abruptly canceled a week prior.
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CoreLogic acquires digital mortgage platform Roostify
Leading property data and analytics company CoreLogic has acquired Roostify, a digital mortgage technology provider.
“By integrating Roostify’s digital mortgage technology platform with CoreLogic’s robust data, analytics and workflow solutions, clients will gain critical information about borrowers and properties at the beginning of the loan process, saving both time and money,” CoreLogic said in a statement on Wednesday.
Terms of the deal were not announced. Both companies are privately held.
In its statement, CoreLogic said integrating Roostify’s mortgage platform into its own network of data assets and workflow platforms would reduce errors and help streamline the mortgage process.
“Due to limitations on when and how lenders receive data about property and borrowers, errors and loan conditions aren’t exposed until much later in the process, during processing and underwriting,” the company said. “CoreLogic has the data assets and workflow platforms to expose critical information about the borrower and collateral much sooner, at the point of sale. Errors and conditions can be identified immediately, resulting in improved customer experience, limited processing and underwriting costs and the ability to apply the appropriate processing and underwriting resources to each loan.”
Roostify, led by co-founder and CEO Rajesh Bhat, has raised $65 million in venture capital, according to figures from Crunchbase. It landed a $32 million Series C funding round in 2021, which was led by Ten Coves Capital, with returning investors Cota Capital, Mouro Capital, Colchis Capital, Point72 Ventures, and JPMorgan Chase.
Roostify, which powers the digital mortgage platforms of TD Bank, Guild Mortgage, HSBC Bank USA and more, allows different lending parties to bring in data and information from online sources. It then tailors that data to the home-buying process. The product is integrated with digital solutions from ICE Mortgage Technology, Black Knight, Equifax, Formfree and Lender Price.
CoreLogic, owned by private equity firm Stone Point Capital, has made a few acquisitions in recent years, notably in 2021 when the firm acquired Next Gear Solutions.
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Mortgage demand falls again as mortgage rates climb closer to 7%
It’s proving to be a brutal February for the mortgage industry, with mortgage demand falling for the third time in four weeks. At a time when purchase activity typically ramps up, the latest mortgage application data is showing that mortgage demand is dropping due to mortgage rates climbing back up.
Mortgage applications decreased 13.3% for the week ending February 17 compared to the previous week, according to the Mortgage Bankers Association. Mortgage demand was down 56.8% compared to the same period last year.
The latest economic data from a solid jobs report, along with a sharp rebound in retail spending and slowing disinflation shifted market expectations. This compelled investors to up their bets that the Fed will have to keep raising its federal funds rate through the summer.
Instead of the central bank pushing the pause button on its tightening of its monetary policy in March, the pause is expected to come in June following three additional 25 bps rate hikes.
This has caused a spike in the 10-year Treasury yields, which acts as a benchmark for mortgage rates. The 10-year Treasury yield rose to 3.95% on Tuesday, up from the previous week’s 3.77%.
“This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected,” Joel Kan, MBA’s vice president and deputy chief economist, said in a statement.
The purchase index declined 18% from a week earlier and was down 41.5% from the same period in 2022. The refi index decreased 2% from the previous week and was down 72% from the same week a year ago.
Rising mortgage rates
Mortgage rates increased across all loan types last week, with the 30-year fixed rate jumping 23 basis points to 6.62% – the highest rate since November 2022.
The 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.62% for the week ending Feb. 17, jumping from the previous week’s 6.39%, according to the MBA. Rates for jumbo loan balances (greater than $726,200) rose to 6.44% from 6.26% in the same period.
At HousingWire‘s Rate Center, the Optimal Blue data showed rates at 6.638% on Tuesday, up from last week’s 6.441%. At Mortgage Daily News, rates were even higher at 6.87%.
The share of refis in mortgage activity increased marginally to 32.5% of the total applications, up from 32% the previous week, and adjustable-rate mortgages (ARMs) also rose to 7.6% of the total.
The FHA share decreased to 12.1% from 12.6% from the week prior, while the VA share declined to 12% from 12.6%. The USDA remained at 0.6%.
The expectation is that mortgage rates may rise to the 7% level soon, putting rates back to where they were in November 2022.
Affordability challenges and the lock in effect
With rising rates will come affordability rates and a “lock in” effect, economists predict.
“Many existing homeowners have mortgages with rates that are well below current market rates, which acts as a strong disincentive to move,” Fannie Mae‘s economic and strategic research group said in its latest outlook.
For these reasons, LOs — including loanDepot’s Baret Kechian — are seeing less move-up buyers than they did before.
“Because even though they might be running out of space a little bit, unless they’re absolutely bursting at the seams, it’s hard to give up a 2.8% rate and trade it in for 5% or 6% and also go to a more expensive property,” Kechian said.
Fannie Mae forecasts that this year’s home sales will be about 4.67 million units before rebounding to 5.12 million units in 2024. Still, this pace is much slower than it has been in recent years due to ongoing affordability challenges.
“The increase in mortgage rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers who are most sensitive to affordability challenges and the impact of higher rates,” Kan said.
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RMBS market is finally catching up to last year’s big rate surge
The residential mortgage-backed securities (RMBS) market took a beating in 2022, nearly stalling as the year came to an end — on the heels of interest rates jumping more than 3 percentage points over the first half of 2022.
That dramatic rate volatility wreaked havoc on spreads and RMBS deal execution — and created cash-flow challenges for many lenders that rely on securitization as a liquidity outlet. As we turn the corner into 2023, however, the landscape so far looks brighter for the RMBS market.
Though still a continuing factor, rate volatility so far this year has calmed considerably compared with last year’s huge rate surge. In addition, a major decline in mortgage originations — a byproduct of higher interest rates — has reduced overall RMBS supply, which market observers say provides a lift to even low-coupon securitization deals.
Those tailwinds in the RMBS market, also referred to as the private-label securities (PLS) market, are providing a boost to both prime jumbo and non-QM (or nonprime) issuance so far this year, market data shows.
“The securitizations that printed in January priced at meaningfully tighter spreads than we’ve seen in some time,” states a recent report from the loan-exchange platform MAXEX. “Improved securitization economics also allowed issuers to improve pricing significantly.
“…Three prime jumbo RMBS deals priced in January for a total volume of $1.15 billion. These were the first prime jumbo securitizations since October 2022 and [it was] the first multi-issuance month since June 2022.”
In addition, according to bond-rating reports, an additional three prime jumbo RMBS deals are in the works this month, as of Feb. 21, backed by loan pools valued in total at $1.1 billion.
Better days in non-QM
The non-QM side of the PLS market is off to an equally good start in 2023, relative to how it finished 2022. A review of available bond-rating reports shows that a total of 15 non-QM PLS deals were in the works as of Feb. 21, backed by loan collateral valued in total at nearly $6 billion. Those non-QM offerings include 13 securitizations involving a mix of owner-occupied and investment properties, plus two deals involving a mix of performing and nonperforming loan collateral.
MAXEX reports that non-QM securitizations (which it calls expanded credit) last year declined steadily month over month starting in late summer — that is until January of this year, which produced the highest total non-QM PLS issuance since August 2022.
“The way spreads and rates have moved incentivizes originators, particularly those who backlogged really low-coupon loans, to come through with deals,” said Ben Hunsaker, a portfolio manager focused on securitized credit for California-based Beach Point Capital Management. “This gives some of the lenders with backlogs of those low-coupon loans an exit strategy, and it frees up capital for that origination ecosystem.
“They’re probably not going to lose nearly as much money as they thought coming into the new year in terms of where they valued [those loans] on their books at the end of Q4, so it’s an unambiguous positive for them. And if you have the critical mass for a new deal with the prevailing coupons, let’s say at rates of 7% plus, you would be highly incentivized to issue those deals today because bond buyers love it.”
Keith Lind, CEO of California-based non-QM lender Acra Lending, stressed that even though market conditions overall appear to be headed toward improvement, that doesn’t mean all securitization deals are profitable for lenders even now. He said non-QM securitization deals in this rate environment still need to be in the “low 7% range to break even.”
For deals backed by loan collateral with coupons in the low 5% range, Lind said, “You’re likely talking about a 5-to-10-point loss, so you’re crystalizing a loss there.”
Lind stressed that Acra has stayed on the right end of that rate curve by raising its rates early and fast.
“We’re locking [loans at] about an 8.25% to 8.5% coupon today,” Lind said in a recent interview. “A year ago, we were at like a 4.75% coupon, and we were the first mover [on rates]. We took a lot of flak for that, but it was the right move.
“That preserved our year on our balance sheet, and we were actually profitable in 2022 because we were very decisive in taking rates up.”
Acra at this point does not securitize its own loans but rather sells them on the whole-loan market servicing-released. Some of those loans are purchased by aggregators that do securitize them along with loans from other lenders. Despite the continuing dour mortgage-origination environment and ongoing uncertainty over interest rates — as the Federal Reserve continues to inch up its benchmark rate to battle still-persistent inflation — Lind sees some prospects for optimism about the mortgage market in the year ahead.
“There’s more tailwinds looking forward into 2023 than headwinds for the non-QM market,” Lind added. “So, we’re fairly bullish moving forward.”
An analysis of bond-rating reports for 2023 PLS offerings in the works through Feb. 21 shows that for prime jumbo deals, the weighted average coupon (WAC) for the loan pools ranged between 3.8% to 5.9% — with the fresher collateral at the higher end of the range.
For the non-QM deals in the pipeline for 2023 through the same date, the WACs range from 4.87% to 8.7%, bond-rating reports show. Non-QM rates tend to be about 1.5 percentage points above the prevailing interest rate, in part because of the added risk the loans entail. As of Feb. 16, according to Freddie Mac, the interest rate for a 30-year-fixed mortgage stood at 6.32%.
A lighter RMBS pipeline
Although the PLS market appears to be getting its sea legs back so far in 2023 as fresher, higher-rate collateral is finally starting to hit the market, volume is still projected to be down significantly from 2022.
Kroll Bond Rating Agency (KBRA) in a PLS report released late last year forecast that overall PLS issuance in 2023 — which it defines as prime, nonprime and credit-risk transfer offerings — is expected to come in at about $61 billion, down 40% year-over-year. An analysis of PLS deals based on multiple bond-rating agency reports shows that this year, through Feb. 21, some 21 PLS deals are in the pipeline valued at about $8.2 billion. Over the same period in 2022, KBRA tracked a total of 31 PLS deals valued at $16.7. billion — an indication of just how much loan-origination volume is off between last year and this year.
That reduced RMBS supply, however, can be good for lenders still in a position to securitize loans.
“Volumes have significantly contracted, so all of a sudden there’s less secondary volume in general,” said Sean Banerjee, co-founder and CEO of ORSNN, a Seattle-based fintech start-up operates a cloud-based electronic whole-loan trading platform. “And when that happens, the coupons of yesterday that are below prevailing interest rates become more valuable because there’s a lack of origination volume, and banks and [other investors] still need earning assets.”
Agency mortgage-backed securities (MBS) volume also is down significantly for similar rate-driven reasons. Although the Federal Reserve’s reduced role since last year as a buyer of agency MBS mitigates the upward pricing pressure created by the supply reduction, given the Fed’s outsized role in recent years as a purchaser of agency MBS assets.
Another bright spot for the RMBS market, according to Mark Fontanilla, a consultant in global structured finance for rating agency DBRS Morningstar, is that significant home-price appreciation (HPA) remains embedded in existing loan collateral, even as home-price growth dips or declines in some regions.
“The most real recent [loan] vintages don’t have as much HPA upside at this point in the cycle versus seasoned deals, which have substantial built up HPA,” Fontanilla said during a recent webinar focused on the PLS market. “… As far as the significant home-price appreciation that’s inherent in almost every RMBS sector, however, that bodes well.
“Given the HPA built-up over the past couple of years,” he added, “there’s been more originator and borrower interest in this side of the market” in terms of the future potential for home-equity lending and related securitizations.
Roelof Slump, managing director of structured finance operational risk at Fitch Ratings, agrees that there is likely to be more activity in the year ahead with respect to securitizations backed by home-equity loans — second liens and HELOCs (home-equity lines of credit).
“Those borrowers who have 3% firsts [first mortgages] who are happy with their homes and happy with their mortgages at that rate may find over time there’s a need or opportunity to take advantage of home equity,” he said. “Does that mean there will be many large issuances?
“I’m not sure, but I think there’s going to be some of that activity. But traditional prime is not dead either, so I think it will be mixed [this year] in terms of the types of [deals] that the rating agencies and investors see, but I think it will be an interesting and multifaceted year.”
Slump hedged his forecast by adding that given the still uncertain mortgage-finance outlook, a quarter-by-quarter assessment is still necessary, “but I think the activity is good right now.”
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