Market Update – US Mortgage Market, Q4 2016
26 January 2017
The US election and inauguration of President Donald Trump has brought uncertainty to the outlook for the US mortgage market. With both houses of the legislature and the administration in Republican control, there is a higher probability of the federal government reducing its influence on the mortgage and housing markets. However, the largest priorities are currently taxes, regulation, healthcare, infrastructure spending and international trade. So, while the probability for change in the government agency mortgage market has increased, it will be slow as it is not a major priority.
GAM’s Gary Singleterry comments on the political impact: “An interesting medium-term sector development is that as a consequence of the government conservatorship, agencies are required to reduce their portfolios of retained mortgages and have therefore been shrinking them for years. Since 2011, Fannie Mae and Freddie Mac’s combined portfolios have shrunk from about USD 1.5 trillion to about USD 600 billion. But we are encouraged that any future changes will probably be for the better since Donald Trump’s nominee for US Treasury Secretary, Steve Mnuchin, knows the mortgage market well as he was responsible for that department when he was a partner at Goldman Sachs.”
On housing, fellow GAM manager Tom Mansley comments: “US prices continued to rise throughout 2016 and we predict that this trend will run at a low-to-mid single-digit rate in 2017. Prepayments have increased in the non-agency sector, driven by factors such as increased home prices and improving borrower credit. The overall net issuance of non-agency mortgages was negative in 2016, resulting in a continued supply / demand imbalance that is tightening spreads.”
The pair expect higher mortgage rates to slow the pace of mortgage refinancing as rate-driven refinancing declines, but this may be partially offset by cash-out refinancing due to home price appreciation, particularly in the non-agency sector. The rise in interest rates brought mortgage rates up by about 25 bps by the end of December, with a 30-year fixed rate of 4.32%. In the residential mortgage market, they continue to favour non-agency bonds over government-guaranteed agency securities, and bonds with floating coupons. In the commercial sector, they are finding good value in multifamily-backed securities and those backed by small balance commercial loans.
Mortgage-backed securities (MBS) remain an attractive investment proposition thanks to their low volatility profile, which beats other medium and high-quality fixed income securities over time. Much has changed since 2009, and informed investors are capitalising on the income stream the asset class offers. 2017 should deliver the continuation of the economic and market trends that we saw in 2016. If any legislative changes are enacted in 2017 by the newly elected government, they would likely be aimed at trying to create a resurgence of a larger and more efficient non-agency mortgage market – with more interesting investment opportunities.
Source: GAM unless otherwise stated. This article is for information only and is not an invitation to invest in any GAM product. The article is intended solely for your professional use (background information) and may not be forwarded to any other person.
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