Tom Millon of Capital Markets Cooperative on Primary and Secondary Market Concerns
By MBA Insights Staff
December 10, 2018
Tom Millon is CEO of Capital Markets Cooperative, Ponte Vedra Beach, Fla., a Computershare company that provides products and services to a nationwide network of more than 500 companies. He is a leading authority on mortgage capital markets and is a published author, frequent speaker and expert on mortgage finance.
MBA INSIGHTS: What would you say are the major concerns of the lenders in the Cooperative?
TOM MILLON, CAPITAL MARKETS COOPERATIVE: It's no secret that the housing market is struggling. Thin margins, declining purchase volume and a lack of inventory in many markets top the list of concerns among the more than 500 companies that make up CMC's membership, which includes a broad cross-section of lenders. Home sales are slowing. Meanwhile, per-loan production costs and servicing costs are at or near all-time highs and housing inventory is near all-time lows.
A lack of alternative lending products is also keeping many deserving borrowers out of the market and making it hard for lenders to grow volume. In a broader context, however, the housing market is experiencing tight conditions across the four ‘Ls'--labor, lumber, land and lending. We have a shortage of labor and land, and building material costs are rising, so there aren't enough homes being built to meet demand. There's also the concern that slowing home prices and rising interest rates will slow that demand, too.
There are bright spots to the market, and the power of CMC's affiliations, products and services can certainly help lenders stay profitable in these challenging times. Even so, there's quite a bit of frustration with the market and a good deal of uncertainty ahead.
INSIGHTS: What factors do you see causing a lack of liquidity in the Ginnie Mae program? Is liquidity still strong in mortgage-backed securities? Is there a drop in demand for mortgage servicing rights? What will need to happen to restore a balance in supply and demand?
MILLON: The lack of liquidity in Ginnie Mae's program stems from a huge fear of legacy false claims issues in addition to the complex operational process surrounding Ginnie Mae's co-issue program, Pool Issued for Immediate Transfer. There are also fewer servicers working with Ginnie than Fannie Mae and Freddie Mac. Many servicers are either unfamiliar or unwilling to work with co-issue programs.
Yes, MBS liquidity is still strong. There is currently about $220 billon in daily trading volume, and only one percent of that number involves mortgage originator hedging. Demand is also strong for MSRs, too, especially with interest rates on the rise. Right now, we don't see an imbalance between supply and demand.
INSIGHTS: The non-QM market continues to grow, causing some concerns over repeating the same mistakes made prior to the mortgage crisis. Are these concerns valid? Why or why not?
MILLON: Indeed, the non-QM market is expanding, especially with rates on the rise. About a quarter of non-QM borrowers were unable to qualify for prime loans because of a prior credit event, so these products are helping more borrowers get into homes.
There are always concerns that history will repeat itself, but based on the types of QM loans being originated today, I don't think there's much cause to worry. Most non-QM lending involves alternative income documentation, which means the borrower's income and assets are still being fully documented, even though the income falls outside of QM guidelines. These aren't the no-income, no-asset loans we saw before the housing crisis. For the most part, non-QM lenders are leveraging new underwriting standards and layering risk differently than the NINA lenders of the past. There's also mounting evidence that non-QM loans are performing just as well as conventional products.
INSIGHTS: What are the implications of rising mortgage rates and tax reform to the origination market? Is it something that should concern lenders in terms of falling refinance volume, purchase loan volume and/or keeping borrowers on the sidelines this year? Will it have an impact on the "move-up buyer?" Could we see more cash-out refinances as homeowners stay in their current homes?
MILLON: Rising rates are having some impact on affordability, and they are definitely having an impact on refi volumes, which have been retreating dramatically. We don't see tax reform having a major impact on the overall market, however. The bigger issue facing the purchase market is a lack of inventory, which is pushing prices higher and out of reach for an increasing number of first-time buyers. So to some extent, yes, this is keeping some borrowers on the sidelines.
According to the National Association of Realtors, millennials are not buying homes as much as the previous generation. That's in spite of a strong labor market and some income gains. Low inventories, rising prices, higher rates - all of these factors are putting would-be first time buyers on edge. Many are staying out of the market, which that has an impact on move-up buyers. Historically, however, periods of low interest rates have not materially impacted the rate of move-up or relocating buyers.
As for the cash-out market, it is growing. I expect that to continue as long as prices are rising in the economy and the job market remains strong.
INSIGHTS: Are we beginning to see more technology enter into the secondary mortgage market for increasing efficiencies in the buying and selling of loans? Are traders adopting this technology and do you believe it will lead to greater liquidity in the secondary market?
MILLON: We're definitely seeing more technology in the secondary market, but I think the jury is still out on secondary mortgage trading online. There have been a number of attempts to sell loans online through loan trading platforms such as Resitrader, MCT Live and others. So far, technology has streamlined the relationship between mortgage companies and secondary market investors, but no one has gained what I would call significant traction in the traditional whole-loan trading market.
The concept is great, by the way--whole-loan trading platforms make a lot of sense. Yet no one has gained much market share. Will that change? Someday, yes--and I hope it does. Anything that increases efficiency and liquidity to the secondary market would be a good thing.
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