Navigating Volatility in the Mortgage Industry: The State of the MBS Market in 2023

The United States housing market has been on a rollercoaster ride lately, leaving mortgage lenders to navigate uncharted waters. With interest rates soaring in 2022, demand from prospective home buyers has been cooling off, leading to increased risks for those holding MBS (Mortgage-Backed Securities). In the last five years alone, banks have added a staggering $1.3 trillion MBS to the market, totaling more than $12 trillion.  

Mortgage lenders are facing a myriad of challenges, with regulatory changes such as increased trading margins and the Federal Reserve balance sheet being unwound. To make matters worse, a widening mortgage/treasury basis further complicates matters. The market is experiencing unprecedented volatility, primarily due to the Federal Reserve's commitment to raising interest rates and the 'quantitative tightening' (QT) program.  

To survive and thrive in this volatile market, mortgage lenders must find ways to streamline processes and improve their data analytics capabilities. By doing so, they can continue providing viable mortgage options to consumers and successfully position themselves to navigate the current market conditions. It's all about being adaptable and staying ahead of the curve. 

Banks Reduce Mortgage-Backed Securities Hold   

As the market shifted, banks were forced to reduce their MBS holdings by approximately $100 billion, bringing total MBS portfolios down to roughly $2.8 trillion by November 2022. This was in response to increasing risks and a Federal Reserve commitment to raising interest rates.  

According to Ethan Heisler, strategic advisor at bond rating agency KBRA, this change affected the entire $8.7 trillion agency or government-backed MBS market. It could lead to further price decline as banks seek ways to minimize losses. Consequently, sales of fixed-rate mortgage bonds by entities such as Freddie Mac and Fannie Mae are predicted to drop nearly 50% in 2023, down to around $300 billion from the estimated $550 billion in 2022.   

Navigating Unprecedented Market Volatility  

The market is currently facing unprecedented volatility, primarily due to the Federal Reserve's commitment to raising interest rates and the 'quantitative tightening' (QT) program. This has caused a shift in MBS holdings by banks, reducing them by approximately $100 billion since November 2022. As a result, sales of fixed-rate mortgage bonds from entities such as Freddie Mac and Fannie Mae are expected to drop nearly 50% throughout 2023.  

Mortgage lenders need to determine how high rates will need to go before the economy begins showing signs of strain and prices start trending lower. This uncertainty has created a liquidity crunch and encouraged buyers to remain on the sidelines, making it difficult to predict the MBS market's future accurately.   

Navigating Volatility in the Housing Market.   

The housing market has been struggling lately, with Bright MLS predicting that home prices could drop an additional 10% in the coming year due to affordability issues and low inventory. To make matters worse, sales of homes reached a nine-year low at 4.87 million. While this is a concerning trend, Coleman believes the decline will not be as drastic as during the 2008-2009 Mortgage Crisis, when housing prices plunged by as much as 30%. This is primarily due to most homeowners having some equity in their homes, meaning they are less likely to have negative equity. As such, the situation has some buffer for those that own homes. 

Embracing Mortgage Lending Automation Solutions 

As the challenges in the market become more complex and harder to anticipate, mortgage lending solutions are becoming increasingly necessary. Streamlining the processes efficiently would mean faster processing of the bundles of documents related to the MBS process, giving your lending enterprise more time to strategize about the right prospects for lending and investment. 

Additionally, Automation helps lenders quickly process loan applications, reduce processing time and manage risk more effectively. Mortgage lenders should look for ways to use data strategically and leverage technology to improve customer experiences. By taking a proactive approach and leveraging the right solutions, lenders can ensure that they are well-prepared for whatever the future of the MBS market may bring.   

If you're a mortgage lender looking to stay ahead of the game in a rapidly changing market, it's time to embrace technology and automate your processes. Doing so will allow you to manage risk more effectively and provide a better customer experience. 

To learn more about how AI-enabled automation solutions can help you streamline your mortgage document management process, check out our blog post "The Role of AI-enabled Automation in Mortgage Document Management". With this blog, you can better understand how technology can help you stay competitive in the market and position your lending enterprise for long-term success. 

Citation: “The Mortgage-Backed Securities Market Faces New Challenges.” Institutional Investor, 26 Dec. 2022, www.institutionalinvestor.com/article/b1h7ld8s7ldou8/The-Mortgage-Backed-Securities-Market-Faces-New-Challenges.