The secondary market, often an afterthought for most participants in the mortgage process, took center stage in 2020.
Think of it as the underdog quickly becoming the hero of the story. It was always there working hard in the background, just waiting for a year as unpredictable as 2020 to come to the rescue.
But to understand the stability that the secondary market brought during a world-wide pandemic, you first have to look back at 2008. The country was in the middle of the financial crisis, as the consequences of the deceptive mortgage lending practices from all the years prior came crashing down.
Ben Bernanke, the former chair of the Federal Reserve, the central bank of the United States, who served from 2006 to 2014, was tasked with responding to the massive impact of the crisis. To inject some life back into the economy, Bernanke decided to grow the Fed’s balance sheet by purchasing government bonds and mortgage-backed securities, better known as quantitative easing.
This unconventional monetary policy is designed to encourage lending and investment, adding money back into the economy and lowering interest rates. The Fed went through three rounds of quantitative easing plans, which lasted until December 2013 when the Fed finally announced a taper, slowly reducing the billions of dollars it was spending. Then, in October 2014, the Fed finally indicated an official end to its third quantitative easing program. That is, until March 2020.
“March was an extraordinary period in the secondary market,” said Richard Koss, Recursion chief research officer and former Fannie Mae director of mortgage market analysis.
“The market completely froze,” he said. “If you look at what was going on, the stock market was crashing, like 1,000 points a day, and it was reminiscent of the global financial crisis when Lehman failed. It had that kind of a shock to it, and people said, ‘Holy shit, I have no idea what’s going on. I’m going to pull my money out of anything not liquid until I figure it out.’”
Everything tanked, Koss explained.
Then, one late night in March, Federal Reserve Chairman Jerome Powell went back to a program that has a history of rescuing the U.S. economy. He introduced a new quantitative easing program.
While he didn’t directly call it that when asked, he said, “What I can tell you definitively is the purpose of the asset purchases. It really is to support the availability of credit in the economy—households and businesses—and thereby support the overall economy. In terms of what it’s labelled, that’s of less interest to me.”
Powell’s decision became an anchor for the U.S. economy as COVID-19 rapidly spread across the world; his actions stabilized the economy and fueled what would become a year of record-low interest rates and record mortgage volume.
In the words of Koss, “The Fed came in, cannons blazing and bought everything in sight, and everything just collapsed back in and market liquidity was restored. The cavalry showed up, and it did what it was supposed to do. And, it worked extraordinarily well.”
Simultaneously, housing officials were also coming up with plans of their own to support struggling homeowners impacted by the pandemic. The introduction of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, a $2.2 trillion economic stimulus bill, included forbearance options for borrowers. And with about 3 million homeowners still in forbearance plans at the end of October, according to the Mortgage Bankers Association, the Federal Housing Administration and Federal Housing Finance Agency extended their forbearance policies for another six months to bring stability.
So now the nation has a Fed that is dedicated to not letting the markets freeze up and policies in place to keep borrowers in their homes. This should be great for the secondary market, right? This answer doesn’t change according to who you ask, as much as when you ask.
The secondary market has definitely played the lead role in the housing market’s narrative this year, but these unusual and unconventional policies come with a cost, or in this case, a lot of questions.
Ralph McLaughlin, chief economist and senior vice president of analytics at Haus, explained it well when he said that in this economic downturn, policy plays a much larger role in what’s going to happen with the health of the housing market than fundamental economics.
Will the government extend forbearance policies again? Will the government introduce another stimulus package? How will this administration oversee housing for the next four years? And maybe one of the biggest looming questions, how is COVID-19 going to impact the economy if there’s not a vaccine soon?
“From our perspective, this year has been a pretty volatile year, especially early on with COVID-19 and the impact of everything and how that impacted capital markets in our mortgage business in general,” said Alex Elezaj, United Wholesale Mortgage chief strategy officer.
But when talking about the capital market, Elezaj said that sometimes things can get overly complicated. Even though there are a lot of unknowns when it comes to the future, Powell’s decision to buy bonds seems to be powerful enough to bring stability to 2021.
Elezaj said that Powell’s decision to come out and say that interest rates will continue to remain low, means that they expect to be in the same kind of environment for at least the next 12 to 18 months.
“For the most part, we do well right now, we will continue to do well, regardless,” said Elezaj.