Page 32 - July 18, 2024 Bulletin

BUSINESS PARTNERfeature article

Andrea F. Pringle
Financial Strategist and MBS Analyst
The Baker Group
A New Era for the Mortgage Market?

The mortgage-backed securities (MBS) market has long been Without the GSEs or the Fed to act as a buyer of last resort, the
supported by a “buyer of last resort,” propping up demand without mortgage market finds itself in different territory these days.
being motivated by purely economic concerns. Until the global Especially as demand from commercial banks has ebbed in the wake
financial crisis (GFC), that role was largely held by the government of the spring 2023 banking turmoil and overall tight liquidity across
sponsored enterprises (GSEs). After the GSEs were taken into the industry. Without a buyer of last resort and commercial banks
conservatorship in September 2008, the Federal Reserve (Fed) on the sidelines, investor demand has become more influenced by
stepped in as the dominant investor. But since September 2022, the relative value investors.
Fed has no longer been an active buyer in the market. And with the The motives of relative value-oriented investors, such as mutual
Fed’s expressed desire to shift its portfolio holdings to include only funds and hedge funds, are purely economic. They aim to buy
Treasury securities, the mortgage market has entered a new era – whichever asset class they deem to be undervalued relative to
perhaps one without a stabilizing source of demand.
other asset classes. Value-oriented investors tend to require higher
At the onset of the GFC, the MBS market seized up. Investors spreads than the big historical MBS buyers. The GSEs, the Fed,
saddled with sour mortgage assets became hesitant to purchase and commercial banks all purchase MBS to fulfill specific objectives
new mortgage securities. Originators, worried they may not be that cannot be met by another asset class. That is not the case
able to offload a newly inked mortgage and fearful of getting stuck with relative value investors, they go where the value is, and their
holding a loan backed by a depreciating asset, became hesitant to influence on the market has helped reset spreads at higher levels.
make new loans as well. The GSEs, facing increasing losses and For MBS investors not on the sidelines, this new era may mark a
depleting capital, had less capacity to buy MBS. Then, once in positive turn in the market as the absence of a non-economically
conservatorship, they were restricted in their ability to buy MBS motivated buyer may well keep spreads wider than they have been
as part of an effort to de-risk the entities. With the foundations of for much of the past fifteen years. A shift to less restrictive monetary
housing finance becoming increasingly shaky, the Fed stepped in to policy and rate cuts from the Fed may also bring commercial bank
stabilize the market. The Fed’s presence as a major buyer instilled demand back in notable size as conditions improve for the banking
confidence among secondary market investors. The increased industry. However, for borrowers, primary mortgage rates may
demand from the Fed’s purchases also drove MBS yields and, have a hard time reaching the lows seen when the big buyers were
consequently, primary mortgage rates down.
in the game. If the Fed can stay out of the mortgage market like it
During the pandemic, the Fed’s impact on the MBS market apparently prefers, those conditions may persist. But there is always
doubled. Once again, the Fed stepped in during a time of crisis, the chance another economic crisis drags the Fed back into the
buying large amounts of MBS and injecting liquidity into the game once more.
market. The Fed’s action helped MBS yields and primary mortgage
rates fall to record lows in 2020 and 2021. But when the Fed Andrea F. Pringle is a financial strategist and MBS analyst at
shifted to a more restrictive monetary policy stance in early 2022 The Baker Group. A native Oklahoman, she began her career
to combat rising inflation, those rates quickly reversed. And when in Washington, D.C., where she also earned her MBA from
the Fed stepped away from the MBS market entirely by the fall George Washington University. Andrea worked on the Capital
Markets Sales and Trading Desk at Fannie Mae for five years
of 2022, mortgage rates climbed further, hitting levels not seen in before returning to Oklahoma to work in corporate finance.
more than twenty years. MBS spreads, which reflect the additional Before joining The Baker Group, Andrea was the Supervisor of
yield of an MBS above a benchmark yield, also widened to levels Corporate Finance at a publicly traded energy company. Since
not seen since the GFC. joining The Baker Group in 2020, Andrea’s focus has been on
mortgage products.

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