Two Big Questions for Mortgage Markets in 2010

I’ll spare you my own top 10 list for the new year — but suffice to say that government support for U.S. housing and mortgages pretty much encapsulates most of my own market outlook for this year. And it’s something we’ve been discussing ad nauseum, both online and in the pages of HousingWire Magazine, for at least the past two months. Instead, what I want to do today is pound the table a little bit. Maybe even more than a little bit, too, about an issue we’ve had in front of our readers for months now. Way back in July 2009, HW’s Linda Lowell warned readers that the future exit of the Fed from mortgage markets would pose monumental problems for U.S. banks. Lowell again zeroed in on the issue in October 2009, and even yet again in November. Tied inexorably with the Fed’s pending purchase exit are new accounting changes, too, that bring big changes to anyone operating in the securitized mortgage market — which is essentially the GSEs. Towards that end, among copious coverage within the pages of our magazine, we’ve been covering news of an expected surge in GSE buyouts arriving in 2010. We’d noted concerns at Credit Suisse about the Fed’s pending exit and the need to ensure that the GSEs do not become net sellers of agency securities right as the Fed is withdrawing its explicit support. Yet, last week, the pages of various financials were strewn with breathless takes on the end of the Fed’s MBS purchase plan, and the current (in)ability of the GSEs to play their traditional role as market backstop. The Financial Times, for example, ran a lead on the issue of just who is going to replace Big Brother in sopping up excess supply in mortgage bonds, even. I’d just like to welcome the FT to the party, months too late. Maybe the disaster in Dubai stole their attention? Right now, if you live and work in the mortgage market on any side of its fence — origination, servicing, or secondary markets — I see only two questions that really matter right now. The answers to both will largely determine the direction of mortgage markets this year: 1. Has the Fed effectively crowded out private buyers? If private buyers line up to start buying as the Fed exits its purchase program, withdrawal of government support will be felt only nominally among investors as spreads should stay tight. But if there is a dearth of private investors in line behind the Fed — a scenario, by the way, that I find more likely than not — get ready for spreads to blow up all over again. 2. Can the GSEs successfully prevent borrower defaults? This is the ‘pig in the python’ debate that has been raging for months within the industry now; and the GSEs are now ‘the market’ for mortgages. HAMP already seems destined to be a colossal failure, with early returns appearing to be abysmal. Government officials have made it clear they are now readying their next horse to ride under the banner of principal reductions, too. (I should note that the question of ‘preventing borrower defaults’ here isn’t a philosophical statement suggesting that defaults CAN and SHOULD be prevented; it’s an investment question that takes market and political realities into account in trying to determine buyouts and associated prepayment speeds. Most readers know my personal position on this issue, and it’s best captured by the idea of kicking a can down the proverbial road.) We’ve been debating these issues online and in print for months, pounding the table as it were, and we will continue to do so — but if the late and muted reaction of much of the financial press thus far is any indication, those investors reading HW are going to find themselves well ahead of the curve. And hopefully in the money. Paul Jackson is publisher of HousingWire.com and HousingWire Magazine.