While not quite the same as the agonies of 2007 and 2008, 2010 was another calamitous year for the mortgage and MBS markets. Here are my expectations on a variety of topics for 2011.
Agency MBS: I expect pressure on spreads to widen for at least the first half of the year. The various Fed programs to stimulate the economy are negative for mortgages, and there is also the possibility of significant headline risk resulting from GSE reform efforts, which are (in theory) supposed to be picked up early in 2011.
I also don't expect radical changes to the GSEs to result from these efforts. The fundamental disagreements on the future structure of Fannie and Freddie are quite profound, and the path of least resistance is to allow them to continue to muddle through. Most importantly, there simply is no other viable outlet for mortgage production than through the GSEs, making them vital to the health of the housing market.
The Foreclosure Mess:I believe that the industry will begin to show progress in cleaning up the foreclosure pipeline in 2011, as servicers appear to be making progress in processing the huge backlog of seriously delinquent loans. A key issue will be whether servicers will have to deal with new housing initiatives from Washington; whether or not you agree with them, they have clearly complicated the already sticky process of managing huge numbers of non-performing loans.
I expect that the efficacy of the foreclosure process will generally be upheld. While a number of individuals will probably be charged with absurd actions such as forging signatures, the vast majority of foreclosures will be allowed to continue. There simply is no justification in allowing people who, in many cases, have missed payments for more than a year to continue to occupy their properties.
Non-Agency MBS:I think we are unlikely to see a restoration of a private-label MBS pipeline in 2011. There continue to be major regulatory hurdles stemming from the passage of the Dodd-Frank financial reform act last year, most importantly with respect to the rating agencies' liability. Their severely damaged credibility, in fact, is another major impediment to economically rational issuance of the product.
There has been talk that a number of lenders are interested in testing the jumbo-product waters. Despite interest in originating this higher-margin product, I don't expect a surge of production in the sector, at least not until lenders can find an outlet for their production.
Prices and spreads in legacy non-agency MBS will depend on how the foreclosure process evolves. If it progresses as I expect, this will benefit tranches that are higher on the capital structure. Lower-priority tranches will in turn suffer both because of the foreclosure cleanup and because servicers will increasingly stop advancing P&I that they view as non-recoverable.
Home Prices: I look for home prices to remain under pressure. The market remains vulnerable to a surge in supply from the foreclosure pipeline, and mortgage rates will probably remain well above the lows they reached this fall.
Litigation and Originator Buybacks: Recent reports suggest that Bank of America has quietly begun negotiations with the investor group, including PIMCO and the New York Fed, who filed a "Notice of Non-Performance" regarding dozens of old Countrywide deals in October. It wouldn't shock me if the parties eventually agreed to some sort of settlement. A key factor will be whether BofA's management believes they can limit concessions to the specific cases at hand, which would allow them to remove a major potential liability without creating precedent for other litigants.
Happy New Year!
Bill Berliner is a mortgage and capital markets consultant based in Southern California.
His email is bill@berlinerconsulting.net and his Web site is www.berlinerconsulting.net.
