Morning Report: A description of the chaos in the mortgage market in late March

Vital Statistics:


Last Change
S&P futures 3126 4.1
Oil (WTI) 37.94 -0.39
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.16%


Stocks are higher this morning on no real news. Bonds and MBS are flat.


Housing starts rose 4% MOM in May to 974,000. This is still 23% below last year. Building Permits rose 14% MOM but are down 9% YOY. Shelter-in-place orders were still in force for most of the country in May. Despite the drop in May, homebuilder confidence rebounded in June.


Jerome Powell heads to Capitol Hill for his second day of Humphrey-Hawkins testimony. Powell was cautious yesterday about how quickly jobs would come back. That said, investors ignored him, pushing stocks higher. Note that the Fed was consistently over-optimistic about the economy during the Obama Administration and has been consistently over-pessimistic about the economy during the Trump Administration. Note the COVID epidemic has swelled the Fed’s balance sheet even more. The Fed now holds $7.2 trillion in assets. Before the Great Recession, it held about $800B.


Fed assets


Mortgage REIT MFA Financial reported earnings yesterday. On the conference call, the company talked about how bad things got in the MBS market in late March:

January, February and the first two weeks of March were very normal and a good start to the new year. And in only a few days, the financial markets and the mortgage market in particular completely collapsed. With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated. Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points. CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days. MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities. In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9. And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.

MFA received almost $800 million in margin calls, and entered the year with about $70 million in unrestricted cash. This was the dislocation in the market that caused the Fed to react so aggressively to support the MBS market. Of course they almost killed the smaller originators and TBA brokers in the process….


Mortgage Applications increased 8% last week as purchases rose 4% and refis increased 10%. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates dropped to another record low in MBA’s survey, leading to a 10 percent surge in refinance applications. Refinancing continues to support households’ finances, as homeowners who refinance are able to gain savings on their monthly mortgage payments in a still-uncertain period of the economic recovery.”

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