2022 Vol. 106 No. 3

30 MAY / JUNE 2022 Michael A. Renninger ”‹ ‹’ƒŽ ;ϯϭϳͿ ϲϵϱͲϳϵϯϵ ŵƌĞŶŶŝŶŐĞƌΛƌĞŶŶŝŶŐĞƌůůĐ͘ ĐŽŵ ‡ —”‹–‹‡• ‘ˆˆ‡”‡† –Š”‘—‰Š —•†ƒŽ ‹ƒ ‹ƒŽ ƒ”–‡”•ǡ  Ǥǡ ͷͳͺ͹ –‹ ƒ ‹†‰‡ ‘ƒ† ƒ˜‡’‘”–ǡ ǡ ͷʹͺͲ͹ ȋͷ͸͵Ȍ͵ʹ͸ǦʹͲ͸Ͷ ‡„‡”ǣ ǡ Ǥ ‡‹‰‡” Ƭ ••‘ ‹ƒ–‡•ǡ ƒ† —•†ƒŽ ‹ƒ ‹ƒŽ ƒ”–‡”•ǡ  Ǥ ƒ”‡ ‹†‡’‡†‡–Ž› ‘™‡† ƒ† ‘’‡”ƒ–‡†͘ ǁǁǁ͘ ƌĞŶŶŝŶŐĞƌůůĐ͘ ĐŽŵ Η&Žƌ ĂŶ ObjecƟve Assessment ŽĨ zŽƵƌ Challenges ĂŶĚ Professional ExecuƟon ŽĨ zŽƵƌ OpportuniƟesΗ x ƵLJͲ^ŝĚĞ ĂŶĚ ^ĞůůͲƐŝĚĞ ZĞƉƌĞƐĞŶƚĂƟŽŶ ŝŶǀŽůǀŝŶŐ ǁŚŽůĞ ďĂŶŬƐ͕ ďƌĂŶĐŚĞƐ͕ ĂŶĚ ŶŽŶͲďĂŶŬ ĂĸůŝĂƚĞƐ x ^ƚŽĐŬ >ŝƋƵŝĚŝƚLJ͕ ĂƉŝƚĂů ĞǀĞůŽƉŵĞŶƚ͕ ĂŶĚ ^ƚƌĂƚĞŐŝĐ WůĂŶŶŝŶŐ x ^ƚŽĐŬ sĂůƵĂƟŽŶƐ ĂŶĚ &ĂŝƌŶĞƐƐ KƉŝŶŝŽŶƐ Ǧ–”ƒ‹‡† ƒ† Ǧ‡š’‡”‹‡ ‡† †‹ƒƒ ’”‘ˆ‡••‹‘ƒŽ• •‡”˜‹‰ †‹ƒƒ „ƒ•Ǥ —” •‡”˜‹ ‡• ‹ Ž—†‡ǣ fast when rates are low and by extending when rates are high. By increasing the average loan size in the TBA market, the collateral skews a bit less desirable, and pricing adjusts to reflect that. Home price appreciation also organically pushes up the average loan size of new MBS. Analysts estimate home prices to appreciate around 5% to 7% in 2022 after increasing nearly 20% in 2021. Additionally, with higher rates, supply will increasingly consist of purchase loans and fewer refi loans. Purchase loans tend to have larger loan sizes, especially when home prices are on the rise. Further, the refi loans made in this environment will also shift from primarily “rate and term” refinances, which characterize low-rate environments, toward cash-out refinances. Cash-out refis tend to have larger loan sizes, because borrowers take cash out of the equity in their homes by increasing the size of their mortgages. Prepayments What these dynamics mean for prepayments may seem straightforward on the surface in that higher rates and higher loan sizes slow speeds, as borrowers are less incentivized to refinance … but by how much? With rate and term refis down, turnover and cash-out refis become an increasingly important part of the picture, and both are buoyed by strong HPA. Record low housing inventory creates a challenge for turnover activity, however. Excess mortgage industry capacity following the hiring surge in 2020-21 may also incentivize mortgage lenders to target previously untapped borrowers for refis in an effort to keep business elevated. All these dynamics create some uncertainty for the mortgage market. One certainty is that these factors will not impact the entire market the same way. Some sectors will feel certain headwinds more directly than others, but that should not deter investment in MBS. Investors should simply be strategic about where to direct investment dollars and consider specified pools over TBA. HB To help promote banking as a career, the Indiana Bankers Association has created a shareable #BetterInBanking flyer. It features information about bank functional areas and matching skillsets, the benefits of a career in banking, and how being part of the banking industry can make a difference in the communities banks serve. To download the #BetterInBanking flyer, go to indiana.bank/betterinbanking-flyer, or click on the green arrow in HB Digital. Additionally, visit indiana.bank/next-gen for details about the IBA Next-Gen Bankers Video Series, Indiana BankLEAD internship program, BankTalentHQ and the IBA Future Leadership Division. HB #BetterInBanking Flyer Available

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