Mortgage activity was already slowing as uncertainty about interest rates, house price movements and employment kept borrowers on the sidelines. But President Trump's rollout of his large-scale trade policies on Wednesday might add fuel to the fire, industry executives say.
While previous rounds of tariff policies had been delayed, altered or even reversed—setting off market instability—mortgage market professionals expect new levies will increase the cost of new housing, deter new building starts, and send ripple effects throughout the housing market. They've already had an
Expectations were already poor for the sweeping changes in Trump's tariff policy announcement on Wednesday, which promised a baseline rate of 10% on all imports, a 34% increase on Chinese goods, and a 20% increase on products from the European Union.
The fear is that inflation is forced higher as suppliers refuse to cut costs and retailers are forced to push up prices.
"The reality was even worse," Adam Hetts, Janus Henderson's global head of multi-asset investing and portfolio manager, and Oliver Blackbourn, portfolio manager, said in a note. "Within the US, the fear is that inflation is forced higher as suppliers refuse to cut costs and retailers are forced to push up prices.
The impact of tariff policy on the mortgage-backed securities market is likely to surface first in the cost of new housing construction. Housing market data provider Cotality estimates tariffs will add $17,000 to $22,000 to the cost of new house construction over the next 12 months. The cost will be affected not so much by tariffs on lumber as by housing fixture and appliance tariffs, said Dr. Selma Hepp, Cotality's chief economist.
A potential reduction in the construction labor force, due to immigration reforms and the possible deportation of undocumented workers, could slow construction and raise housing costs.
According to Cotality's analysis, household fixtures such as appliances, lighting and cabinetry could increase in price by 10%-20%, and potential new tariffs on Chinese steel could alter budgets by double-digit percentages.
A potential reduction in the construction labor force, due to immigration reforms and the possible deportation of undocumented workers, could slow construction and raise housing costs, impacting market stability, according to Victor Kuznetsov, co-founder and general partner at Imperial Fund Asset Management.
"Households, businesses and the stock market are all reacting to the increase in policy and economic uncertainty with respect to international trade and the degree of restraint in fiscal policy, by taking at least a temporary pause," the Mortgage Bankers Association (MBA) said in its March 2025 forecast.
The MBA's estimate for change in residential investment dropped to -1.3% in Q1 2025 from +5.4% in Q4 2024.For the week ending March 28, 2025, mortgage loan application volume decreased by 1.6% on a seasonally adjusted basis from one week earlier, the MBA reported. The drop in applications came after 2.0% and 6.2% drops in the previous two weeks. However, for the week ending March 7, 2025, mortgage applications had increased 11.2% from one week earlier.
Stable outlook for MBS
Global trade policies are probably not having a big impact on existing mortgages, however, and the outlook for existing MBS is stable, Kevin Kendra, Fitch Ratings' head of RMBS, told ASR. He is not expecting a spike in delinquencies across all residential mortgage-backed securities products, although there could be a small uptick at the lower end of the credit spectrum.
Fitch's U.S. Cross-Sector Housing Monitor report expects rising debt-to-income ratios to slightly weaken its rated RMBS loan performance in 2025, with serious delinquencies increasing to 1.7% from 1.4% in 2024.
"We're seeing stable loss expectations and some prepayments that deleverage and derisk security structures," Kendra said. "This is creating upgrade pressure, so I expect more RMBS upgrades than downgrades." The MBA reported a rise in credit availability in February 2025, particularly evident in non-QM mortgages.
"Mortgage credit availability in February increased for the third consecutive month to its highest level since March 2023," Kan said. "A lot of the growth that we've seen over the last two months has been in jumbo and non-QM mortgage types, although by historic standards it's still very low. There is certainly appetite for the product.
Investors are particularly interested in non-QM loans because of their higher yield, especially for rental property with good debt service coverage ratio (DSCR), said Lloyd San, senior vice president, enterprise business development, at real estate software vendor Voxtur, which also works with portfolio sellers to standardize, quantify and package their loan portfolios.
"Investors are looking for loans with lower loan to value (LTV) and debt to income (DTI) ratios," he said. "They feel the risk justifies the reward of a higher yield."
U.S. tariff policy changes are expected to have an enormous impact on the global economy, but not necessarily the positive one that the current administration is looking for. Fitch's Global Economic Outlook for March 2025 has cut its U.S. 2025 growth forecast to 1.7% from 2.1% in December and its 2026 forecast to 1.5% from 1.7%. It expects the U.S. unemployment rate to rise to 4.4% in 2025, up from 4.0% in 2024 and 3.6% in 2023.
"The new U.S. administration has started a global trade war that will reduce U.S. and world growth, push up U.S. inflation, and delay Federal Reserve rate cuts," according to Fitch's Global Economic Outlook for March 2025 report.
