Mortgage Back Security: How it affected Albuquerque’s Real Estate Market

Dec 22, 2021 | Albuquerque Real Estate News

Mortgage Back Security: How it affected Albuquerque’s Real Estate Market

(Transcript Snippet): “Tego:

Since we were talking about this, you know, 2008 thing and you know how honestly, it was probably mismanaged. A lot of people missed it. Right. What happened back then? Yeah. But what happened in March of 2020? Mm-hmm there were some really, you, you were telling me about this and I think it’s a really interesting story to understand what happened back then, when everything kind of hit the, you know, what, right. And there there’s been a lot of criticism of the, the fed for buying mortgage back securities. Right. And so first off, ex explain what mortgage back securities are.

Chris:

So in the best way to describe it in layman’s terms, is,ureally, if you go back historically, it used to be that loans of any type or a mortgage loan. You went to a bank. Yeah. Somebody at the bank went back to the vault, grabbed a hundred thousand dollars, brought it out, gave it to the seller and the bank would give you, you know, however many years to pay. Well, it’s like a wonderful

Tego:

Life movie, right? Yes. You know, it’s in Joe’s house and it’s in yeah. Anyway. Yeah. The Smith’s house. Yeah.

Chris:

But now everybody’s loan and unless you go to a small bank and they do what we, now we call that a portfolio loan. So the bank’s gonna lend you the money and they’re gonna keep your loan for 30 years. Those are few and far between rates are usually higher. And, and they’re typically doing those because they need to get creative on the loan, right? Yeah. But ultimately for the rest of us, most of us, your loan is an investment commodity. So you come to me, I take your application, we look at your credit and various factors and say, okay, I can lend you this amount of money at this particular interest rate. But the folks at my headquarters are all ready, hedging, those funds, they’re gonna sell that loan. We sell directly to Fanny and Freddy, although some other servicing bank will actually service it for some period of time. Right? So everybody’s loan is earmarked to be sold. It’s sold based on that interest rate that it’s locked at. And then ultimately big, big firms take, you know, a billion dollars worth of loans and bundle them into an investment commodity.

Tego:

So let me just understand something. Does Fanny and Freddie actually sell those investment vehicles or do they still keep ’em on their books? That’s what I don’t quite understand. So, so

Chris:

The way that it works, it basically you are giving people the ability to invest in, in a block of mortgages. I got it. Okay. Right. And so folks are able to buy mortgage backs, securities they’ll often abbreviate that then just call the mortgage bonds. And so you are investing in that based on a block of loans that are sitting at a particular interest rate. And so really the mortgage loan, there are a number of people who are making money off of that loan as an investment in the long haul, it’s really most basic or simple for us on the loan side, because for a mortgage banker like myself, we are paid by that investor when they buy the loan. So it’s pretty cut and dry. Yeah. We do the loan. They say, thank you for this great loan, you get this percentage of the loan amount. And the, you know, corporate gets the percentage and then a percentage goes to the loan officer and so forth and so on. Right. But then beyond that on the secondary market and into the mortgage back security market, then those investments get a little more complex. So,

Tego:

So what happened in March of 2020? That, that really, you, you said something and, and I’ve heard this before, but we were on the brink of the housing market, just screeching to a halt.

Chris:

Yeah. And most of that, when we, when we’re talking housing market, we were really talking about banking. Yeah. predominantly mortgage banking, but keep in mind that consumer banks are depository banks, Wells bank of America, they’re all heavily invested as well into mortgages. And so what was taking place and it’s, it’s hard to nutshell this thing cuz it is kind of complicated. Yeah, it is. It is. So as, as it was abbreviated, as I could make it, we, you know, rates three and a half years ago, Tina and I did a mortgage three and a half years ago, our loan was 4.75. That seemed really great for the time then February, they just started talking about COVID. Yeah. And COVID then began to have an impact on the stock stock market. Historically when the stock market declines mortgage backed securities do better, which means rates get better, they get lower mm-hmm <affirmative>.

Chris:

And so only the stock market was really taken the first significant hit from the COVID news and acted impact on, on global investments and so forth and so on. And so rates started getting better. In fact, Tina and I refind in February at three and a half thinking, that’s it? I did too. You know, the lowest rate we had before that was 3.8, seven five. Yeah. And I think we got that in 2009, 2010 after, after the when we got into the recession. And so everybody, lots of people started to refinance and purchase and I did see a significant influx of folks buying second homes, cuz it seems like free money at three point a half percent. Right. Right. And a lot of folks buying investment properties, especially those wanting to do short term rental scenarios. So there was this huge influx of loans.

Chris:

Some of these loans were sitting there floating in mid-March but a lot of them got locked. They got locked at three and a half, maybe 3.37, five mm-hmm <affirmative>. And we went to bed on a Friday in mid-March I’m trying to remember the date, eighth, ninth, something like that. And we woke up on a Monday and mortgage back securities decided to for the first time in my mortgage career, follow the stock market in a, in a decline. And they tanked we saw over a hundred basis point loss in mortgage, back securities, which meant we locked a bunch of loans the week before, which are now, you know, sitting at a low interest rate and, and today’s market this new Monday morning, we wake up and rates are higher.

Tego:

So, so let me, let me just make sure we’re we’re on track here. So, so basically we have all these loan commitments out there, right? Lots of them. Yes. A lot of them, a lot of them and this Monday comes around and all of a sudden the rate for those, the, the return for those drops substantially, which, which basically means nobody wants them. Right? So you have commitments for this stuff, but nobody to buy

Chris:

Them. And the sheer volume leading up to that crash per se, in, in mid-March the volume itself log jam, the banking system. This is where regulations, which were good then began to create issues with banks, moving money to each other on the short term this was before the fed stepped in and lowered that overnight interest rate from bank to bank, you know, basically to down to zero. Yeah. And they had to roll back and work around. Some of the regulations were put in place because they simply could not move money. And so you’d have a bank with, you know, a couple thousand loans that they locked. They would call the investor, you know, or, you know, reach out to contact the investor. And there was no answer on the other line. I mean, everything was log jammed and we were watching mortgage back securities oscillate up and down over the course of several days as, as much as 125 basis points and basis

Tego:

Point is basically one, 100th of, of percent.

Chris:

Right? So we’re watching these values, which typically, you know, go on a nice, slow gradual line. They’re they’re zipping up and down and up and down and we’re all holding our breath. I mean, we’re, we were literally sitting there wondering what happens, like where is where’s the fourth quarter hail Larry touchdown. That’s gonna save, you know, the

Tego:

Industry. Well, that’s a great segue. So what, what happened? The fed stepped in. Yes. So, and

Chris:

That was the hail Mary, the, the first, the treasury. Yeah. Treasury. A couple of things that had to happen is they had to then, you know, meet and roll back. Some of those regulations, they had to free up money and, and make it easier for the banks again, to get money to each other and move money around. We had to get liquidity and then ultimately they needed to stabilize mortgage backed securities. Historically they never followed stocks. They would always move in the opposite direction where every day that the stocks would tank so would so would MBS. And so the feds realized the only thing to do was purchase the mortgage backed securities. And they started purchasing him, but you know, 34, $40 billion a clip. And that began to stabilize the market, all that drastic fluctuation that we saw leveled off, but it came to rest with mortgage back securities better than where they were prior to those several days of, of crazy. Yeah. And so they settled back into a place to where now rates were, where they were at three and a half, 3.375. Yeah. We were at three even and maybe on a good day, 2.8, seven five. Yep. And there would be other things that would take place that would drive those rates even lower. Yeah. Yeah.

Tego:

So, so, so now we fast forward. Okay. So we’re were talking about what happened in March of O of 2020. Yes. And in, you know, you can disagree with it or whatever, what the fed and the treasury did. Yeah. The, the thing is they kept the money flowing and, and honestly it’s not much different than what happened in 2008 with Paulson and some of the stuff again, to keep the banking system working. Right. fast forward to today, the fed this week came out and said that they are going to they’re planning on tapering, right? Yes. Right. We hear that term a lot. So basically tapering means they’re just not going to buy as many mortgage backed securities. Correct. For the most part. Yes. That’s part of

Chris:

It. Yeah. And, and all these things as these little subtleties, even just the announcements themselves affect the market. Right. So the first time that the feds used the word tapering, which was months ago, we saw an impact on or rates that actually set, you know, rates a little higher. And that was the new plat, you know, the new base, the new plateau that we were working from. And so, yeah, you know, they’re talking about going from 30, 40 billion of purchases down to 15, and eventually they’re gonna wean off of these purchases altogether. Yeah. there’s other things that the feds did in the process too, that they had never done before, which was actually buy bad debt. So the feds got really creative in this market. And yeah, there’s, there’s folks that, that side on both sides of that, but from our perspective and what I saw taking place in the market, they, they just needed to do something to stabilize things.

Chris:

And, and in the end purchasing those mortgage bonds was really the only hell married that, that they had one of the effects that took place though. And they actually tapered back a little bit early in the process is they ramped up their purchases. And a lot of piggyback investors jumped on board. Yeah. And so a lot of folks started buying them and they drove the value of mortgage back securities up higher than I’d ever seen. And we started looking at two and a half percent rates on, on a 30 year fixed. It’s not that feds didn’t want us to enjoy those low rates, but that’s not the effect that they were looking for. And so they rolled back for a bit in the hopes that these piggyback investors would fall off and they just wanted to keep it stable. Yeah.

Tego:

Yeah. And, and the stability I think is, is the thing that, you know, obviously the, I think they want. Yeah. so we, we come to today, you know, we’ve, we’ve enjoyed these 3%, you know, plus or minus interest rates now for quite a while. Yes. For, for 30 year fixed mortgages, which, you know, if people don’t understand 30 year fixed mortgage fixed rate mortgage is a rarity around the world. Yes. We in the United States have it really, really good when it comes to the this right. Yes. you know, three and a half percent down FHA, you know, mortgage programs. I mean, all these programs that, that encourage home ownership is a, a us phenomenon for sure. Yes. Yes. However you get the, the naysayers that now say, well, look what you’ve done now you’ve appreciated market by 25% in two years or whatever the number is.

Tego:

Right. You know, it somewhere in there, right. We’re doing, you know, now we’ve had two years of, of some double digit home price appreciation and some people point at the fed and said, no, you shouldn’t have done that. Cuz now you’ve driven up prices and yada yada yada. Right, right. So I, I I’ll, I’ll take, I’ll agree with that a little bit. However, the, the, the thing in, in Chris, you know, this, I know this here in, in Albuquerque, we’ve been seeing a strong real estate market all the way back to 2019. We knew at the beginning of 2020, this is, you know, you know, December of 19, January, February, that 2020 was going to be a busy year for real estate. And at that time we were at what, 4% interest rates, right? Yes. So the demand was already there. Yes. Right. You know, COVID and rates and you know, less people wanting to put their homes on the market, all that stuff drove the supply demand, which drove prices and, and we’re still in that cycle. Yeah.

Chris:

You, you, you know, you’d have to get granular in that to really break down it’s it isn’t any one single thing. Right. Of course it certainly just lower interest rates. It drove up home prices. Well, people, it could have been that there was a pandemic and folks stayed home or were, were, were laid off and were in no position to list their homes or move or do anything

Tego:

Different. Right. I think, I think our natural inclination is we just want the binary. Right. We want the simple, simple one point answer, right. Again, if you go back to 2008, you can’t just say, well, it was just this, right. Or it was just to this, right. It’s a lot of things. It’s the perfect storm

Chris:

Events, right. It could be that folks realize that they could work from home now. And so why sell? Why move, you know, for a while people would relocate for employment. Well, that went out the window for two years and may never go back to looking the same other than, and you and I talked about this earlier, something that could affect a real estate market. When you think about it, now that we can work remotely, why would you work remotely in the cost of living area like California, if you can work remotely in a cost of living area like New Mexico. So I think we might see some migration out of higher cost of living areas for those folks that can keep the same income, but relocate somewhere

Tego:

Else. So actually I’ve got an interesting, I always love these counter narrative stories. I saw some research, just I, I was on a national association of realtors conference here just a couple days ago, doing a, kind of a wrap up of 20, 20, 20, 21 and looking at 2022. And one of the things was a demo, a demographer. And he was talking about moving patterns. And the thing that was interesting, actual moving is down for 2021 versus 2019. So, you know, but you, you, everybody thought, oh wait, everybody’s moving. Right. But it’s, it’s actually, it’s not, people are not moving quite as much. And we see that here, if we just go really granular here locally in Albuquerque, the number of homes, you know, on the market coming on the market, you is, is lower. You know, this year definitely lower in 2020 than, than previous years, 18, you know, 19 20 17 and so on. So yeah, the number of people putting their homes on the market has declined, which again is, is, is skewing this whole supply demand question. Okay. Let’s do some predictions, Chris. So wait my,

Chris:

Go ahead. Oh, go, go. Go. No, no, I was gonna your point. No, I was gonna be, I was gonna be facetious and say predictions. My crystal ball shattered about mid March. Yeah, I know. And it, it hasn’t worked since just before we, I wanna make sure we get onto topic. I know some folks are concerned about a repeat of foreclosures. Yes. Like that took place in oh eight through, you know, oh, oh 2010. Yeah. difference back then was the immediate onset of the recession hit housing prices right away. Housing prices began to decline rapidly. And so when folks for various reasons and the economy were in a position to where they weren’t able to make the house payment, they were also upside down or break even at best, they didn’t have equity in the home. So it was sort of a double jeopardy situation.

Chris:

Whereas now, and I’m, I’m sure you could. Yeah. Validate this point is that folks are sitting on equity in their homes. They have money. And so we have the furlough programs that are out there, which was a focus of concern. Are these folks gonna just simply never get back to the forbearance programs for forbearances forbearance, sorry, forbearance programs. We, we hear, you know, whispers and rumors and things that the, you know, that the federal government and other folks are really gonna try to push for investors to get creative, to help these people stay in their homes so that we don’t have foreclosure, but ultimately in the end, I think we’re in a different scenario where, because if somebody isn’t gonna be able to come out of furlough, but they have 10% or more of equity in their home, then instead of waiting to go to foreclosure and walking away from home they could choose to list the home, put it on the market and then at least walk away with, with some funds and get into a rental situation. So there are things about today’s environment that are different than oh 8 0 9.

Tego:

And that’s just one of ’em the, the strength of the loans. We’ve already talked about that the, the, the type of buyers that are in these homes that actually own these homes. Yes. There there’s so many reasons and you know, the, the forbearance statistics, you know, at one time there were over 7 million people in the country, in the forbearance programs. Now it, it just dropped below a million. It’s now like 900,000. Yes. And I, I have a, a report that I can run here locally for New Mexico that runs and looks at all the Liz pendens filing. If you don’t know what that is, that’s the pre foreclosure filing. That’s when a, when a lender goes to the courts and says, look, we gotta, we’re gonna be foreclosing this, this property. It’s like nothing there. There’s very, very few in, in the pipeline right now. So we’ll keep an eye on that and see, but we definitely don’t see a repeat, you know,

Chris:

Don’t see, see, it’s, I can’t see making a comparison between today’s market and in 2008, 2009.

Tego:

I’s really, if we wanna look for a I, I, I don’t like this word, but you know, some sort of catastrophe or some sort of, you know, big challenge that we have or crisis that’s, that’s what I was actually looking for the crisis. It’s the affordability. Yeah. Right. Yes. You know, we, we can’t have home price growth and, or let, let me put it this way. Housing cost growth, that’s both purchase and rent at whatever it’s spent anywhere from to 15% per year, when you have wages kind of stagnant still. Yeah. Yeah. So, so, you know, we can’t keep doing that. So that that’s really the, the, the challenge is at some point we’re just gonna get to a wall where people just can’t afford yes. The, the roof over their head. And there’s I will tell you on this conference, Amazon, the other day, there’s a lot of stuff in the policy makers agenda about, you know, housing vouchers down payment assistance programs. Yes. Affordable housing programs. Yes. that one of the things I’m hearing a lot about Chris is people are, are wanting to encourage local municipalities to do better on high density, allow for more high density, allow for auxiliary dwelling units, basically putting, you know, the, the mother-in-law suite in the backyard or whatever you wanna call it. Yes. So there’s a lot going on in that world right now, but that’s really the crisis right now is the, for the affordability or the building affordability that’s

Chris:

Challenges, push creativity. Right. And that creativity is really to everybody’s benefit. So as we can get more creative and offer more housing solutions, then yes. And, and I, you know, in another life I spent about 14 years in the public housing arena. Yeah. And had been to a Nu travel to a number of wonderful cities that had come up with excellent, mixed and estimate solutions for, you know, having a, a variety of affordable housing scenarios. So I think we’re gonna just see more of that creativity moving forward. Yeah.

Tego:

I, I, my, my, my hope and wish is that if, if we do this, that they’re not that there’s some sort of ownership program. Yes. And, and not just giveaways.

Chris:

Absolutely. And that’s some of the things that I’ve seen. I, these cities do miraculous things. It was in Virginia just on the DC border Uhhuh <affirmative> was working with some folks there at a housing agency and they had built these, it was a townhouse and then two condos and a townhouse and two condos, and it was mixed. It you know, it was a mixed purchases. So you had some people that were buying ’em outright. You had some people buying them through affordability programs. Some of them were actually public housing. And so there was this incredible mix and it was all wrapped into an HOA. I mean, the properties were kept and maintained. And so you had doctors and lawyers buying these to be that close to downtown DC, but having other people benefit to get into the same places with affordability program. So some really creative things,

Tego:

And we need that in, in the Albuquerque area, if anybody’s listening, that’s, you know, got the ear to some of the policy makers in the Albuquerque area that, that we, we really do have some challenges in that area, but it has to be done. Right. Yes. You know, some of the zoning stuff. Yes. Streamlining zoning, streamlining

Chris:

Examples out there. Oh, they are. So nobody has to reinvent the wheel. Yeah. King county Washington did some fabulous things with their mixed investment developments, which are beautiful neighborhoods that would ride have the size of a, a development like Cabazon and Rio Rancho. Yeah. You know, so the, the role models are there, the blueprints are there, nobody needs to invent a wheel. We just need to send some representatives to go see how it’s done. Well,

Tego:

The, the, the big challenge is the, the nimbyism, which is, you know, not in my backyard. You know, I have a friend that, that tore down an apartment building. It was just a dump and it’s gonna build this beautiful apartment building back in its place. And he can’t get it through zoning now. Yeah. Yeah. And it’s just, you know, it’s helping him.

Albuquerque Real Estate Market discussion: The regulation part of the mortgage industry

Dec 21, 2021 | Albuquerque Real Estate News

Albuquerque Real Estate Market discussion: The regulation part of the mortgage industry

(Transcript Snippet): “

Tego:

So, so Chris and I, uh, saw each other the other day and we just started geeking out talking about what’s going on in the real estate market. We’re great at geeking out. Yeah, we are. We really are, you know, on, on this, you know, data and analyzing what’s going on in the real estate industry as well, all as the mortgage markets, which obviously they’re all, you know, go hand in hand very much. Yes. Um, one of the things that, uh, gets talked about sometimes, but maybe not enough is the regulation part of the mortgage industry. Yes. Uh, I, I, I think everybody, I think everybody can agree. I don’t think many people can argue with it. The prob ones that we had in 2007. And of course, you know, when it really fell in 2008, a really big portion of that had to do with poor lending standards. Yeah. Is that fair?

Chris:

Well, literally what had happened leading up to that was the deregulation of lending per se. Yeah. And, and there were a lot of schools of thought it behind that really to make the lending process more readily available to more people. Yeah. Right. And that’s something that we’re gonna have to watch moving forward now with the way that the market’s going. Absolutely. Is we, we have to be careful not to have administration step in and say, well, we need to make this easier for everybody and end up back in the same place. Yeah. So in, in that effort to make loans easier and more available to more folks, it just meant that the stability of those loans were not nowhere near, compared to the St. The stability of loans today based on today’s regulations. Yeah. And so, yes, ultimately in the end, it was a perfect recipe for, you know, millions of people to be in a mortgage that anything goes wrong, a layoff, a fluctuation and income, and then things begin to destabilize. And so of course there were other things at play, but that those readily available easy to obtain mortgages certainly didn’t help

Tego:

At all. And, and the thing is they don’t exist today no. To, to the, the way they did back then. Right. Adjustable rate mortgages. That’s, they’re really not a thing. Right. I mean, technically,

Chris:

You know, the, this fixed rates are so good. Yeah. That the need that yeah. The benefit of an adjustable rate, we don’t see it in our market. It, it was, you know, those were good short term scenarios where that maybe the adjustable rate would be a full percentage lower than a fixed, but only for a period of time, maybe for five years. And the, and at the end of the five years, you had to make a choice, either refinance into a fixed, or maybe you were only gonna keep the property for five years. Yeah. And so, but right now fixed rates are so competitive. They’re so low that we, you know, we simply are not doing fixed, or we’re not doing variable rates at all. We’re not doing any variable rate mortgages in our, our business.

Tego:

Yeah. I, you know, so if we go back to 2000 and, well, actually I got the chart here. If we go back to 2000 and, uh, let’s say 2005, 2006 mortgage rates were around 6%. Right? Yes. And, and, and they actually moved up in 2006, seven, I guess it was almost to 7%. Right. And, and, and the thing that’s, that’s interesting about that, you know, 2007 is really when everything kind of came to a head and was like, okay, we got a problem here. Right? Yes. The thing that was interesting though, home prices really didn’t start declining until a year later. Right. So I guess what I’m getting at is there was a reason to have adjustable mortgages back then when, when you had a six, 7% mortgage rate, right. Yes. Now we’re at these three, three and a quarter three and a half. Right. Right. So,

Chris:

So the need for the variable and, and the ability of investors to hold and service them at a low enough interest rate to make it lucrative for the investor. Right. The market just doesn’t need the variable rates the way that they did, but yes. Rates at 6%, 7%, if you could get a variable at five yeah. For at least five years, and you’re gonna sell the property or in a refinance, then yeah. Then, then there used to be benefit to

Tego:

It. And I think the crux of this conversation is the, the mortgage that had been made in the last, let’s say 10, whatever it is, you know, back to 2008, eight, nine. Right. Right. These are very well underwritten mortgages. Yes. They’re they’re yes. People wanna buy ’em, they’re not, they’re not junk. They’re not junk investments. Right, right. Um, right. And, and so, you know, when, when we talk about differences now versus then that’s, that’s a big one now, obviously now, versus then we’ve got this huge move in home price. Yes. Home price appreciation. Yes. Which, which is concerning for a lot of reasons. Um, one of which is, is just affordability for people that, that want to get into buying a home and owning a home. Yeah. Yeah. And, and so there’s some challenges there.