Mortgage Market Slump: Is it Interest Rates or Jobs and Consumer Income?

Mortgage Market Slump: Is it Interest Rates or Jobs and Consumer Income?

Over the past week, most of the major banks in the mortgage sector have been issuing guidance to investors regarding the outlook for mortgage lending volumes going forward in 2014 and beyond.  For the past several months, I have been worried about the transition from refinancing to purchase volumes, both for banks and non-banks.  The good news is that the mortgage loan refinance boom lasted longer than many anticipated.  The bad news is that the industry data and operational announcements by financial institutions have a decidedly bearish slant.

Even during the refinancing boom, bank balance sheets have been flat in terms of holding of 1-4 family mortgages.  More important, the flow of securitization and sales has been falling during this period.  How do you think this chart will look this time next year?  

The sharp downward inflection in 1-4 family mortgage loans securitized and sold in 2009 is partly a result of the FASB 166 rule change on off-balance sheet vehicles.  But key take away is that the aggregate bank portfolio of 1-4 mortgage loans is essentially flat and slowly trending lower — even as home prices have risen.  As we’ve discussed in ZH, if you take distressed sales out of the equation, the Case-Shiller 20 city index is up high single digits YOY.  But the lack of credit growth in the US banking industry is a very disturbing trend.

Securitization of 1-4s is running about 1/2 of pre-2009 levels, which averaged around $1.1 trillion per quarter in 2008-2007 vs ~ $600 billion per quarter today. Obviously banks don’t want to show the Street a sharp drop in retained portfolio levels, so the variable is loans securitized and sold. You may recall that WFC retained a large chunk of agency eligible paper earlier in 2013 and Q4 2012 and had to disclose same in the SEC filings.

Bottom line is that investors need to stop listening to the happy talk coming from the economists, and start focusing on what banks and other lenders are saying and doing operationally to adjust for the mortgage market of 2014 and beyond.  To their credit, JPM, WFC and other banks have been pretty forthright in providing forward guidance.  But does anyone want to hear it?

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