Our co-heads of Securitized Products Jay Bacow and James Egan
explain why recent U.S. government measures won’t change much the
outlook for mortgage rates, home prices and sales this year.
Read more insights from Morgan Stanley.
----- Transcript -----
Jay Bacow: Jim Egan, I see you sitting
across from me wearing a quarter zip. As old things become new
again, my teenager would think that is trendy.
James Egan: I think this is one of, if not
the first, times in my life that a teenager has thought I was
trendy, including back when I was a teenager.
Jay Bacow: Well, as captain of the chess
team in high school, I was never trendy. But Jim…
Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of
Securitized Products Research at Morgan Stanley.
James Egan: And I'm Jim Egan, the other
co-head of Securitized Products Research at Morgan Stanley.
Today, we're here to talk about some of the programs that are
being announced and their implications for the mortgage and U.S.
housing markets.
It's Tuesday, January 20th at 10am in New York.
Now, Jay, there have been a lot of announcements from this
administration. Some of them focused on affordability, some of
them focused on the mortgage market, some of them focused on the
housing market. But I think one of them that had the biggest
impact, at least in terms of trading sessions immediately
following, was a $200 billion buy program from the GSEs. Can you
talk to us a little bit about that program?
Jay Bacow: Sure. As you mentioned,
President Trump announced that there would be a $200 billion
purchase of mortgages, which later was confirmed by FHFA director
Bill Pulte, to be purchased by Fannie and Freddie. Now, we would
highlight putting this $200 billion number in context.
The market was probably expecting the GSEs to buy about a hundred
billion dollars of mortgages this year. So, this is maybe an
incremental a hundred billion dollars more. The mortgage market
round numbers is a $10 trillion market, so in the scope of the
size of the market, it's not huge. However, we're only
forecasting about [$]175 billion of growth in the mortgage market
this year, so this is the GSEs buying more than net
issuance.
It's also similar in size to the Fed balance sheet runoff, which
is something that Treasury Secretary Scott Bessant mentioned in
his comments last week. And so, the initial impact of this
announcement was reasonably meaningful. Mortgage spreads
tightened about 15 basis points and headline mortgage rates
rallied to below 6 precent for the first time since 2022 on some
mortgage measures.
James Egan: Alright, so we had a 15 basis
point rally almost immediately upon announcement of this program.
That took us, I believe, through your bull case for agency
mortgages in our 2026 outlook. So, what's next here?
Jay Bacow: Well, we have a lot of questions
about what is next. There's a lot of things that we're still
waiting information on. But we think the initial move has sort of
been fully priced in. We don't know the pace of the buying. We
don't know if the purchases are going to be outright – like the
Fed's purchase programs were. Or purchased and hedging the
duration – like historically, the GSEs portfolios have been
managed. We don't know how the $200 billion of mortgages will be
funded. The way we're kind of thinking about this is if the
program is just – and this is a podcast, not a video cast but I'm
putting air quotes around just – $200 billion, it is probably
priced in and then maybe and then some.
However, if the purchases are front loaded or the purchases are
increased, or maybe this purchase program indicates possible
changes to the composition of the Fed's balance sheet, then there
could be further moves in spreads and in mortgage rates.
But Jim, what does this mean to the mortgage market writ
large?
James Egan: Right. So, when we think about
what you're talking about, a 15 basis point move in mortgage
rates, and we take that into the housing market, the first order
implication is on affordability. And this is a move in the right
direction, but it is small from a magnitude perspective. You
mentioned mortgage rates getting below 6 percent for the first
time since 2022. When we think about this in the context of our
expectations for 2026, we already had the mortgage rate getting
to about 5.75 in the back half of this year. This would take that
forecast down to about 5.6 percent.
That has a very modest upward implication for our purchase volume
forecast, but I want to emphasize the modest piece. We're talking
about [$]4.23 million was our original existing home sales
forecast. This could take it to [$] 4.25 [million], maybe as high
as [$]4.3 [million] with some media effect layered in. But any
growth in demand, when we think about the home price side of the
equation, we think we'll be met with additional listings.
So, it really doesn't change our home price forecast for 2026,
which was plus 2 percent. So very modest, slightly upward risk to
some of our forecasts. And as we've been saying, when we think
about U.S. housing in 2026, the risk to our modest growth
forecasts, 3 percent growth in sales, 2 percent growth in home
prices. The risk has always been to the upside.
That could be because demand responds more to a 5 percent handle
in mortgage rates than we're expecting. Or because you get more
and more of these programs from the administration. So, on that
note, Jay, what else do we think can be done here?
Jay Bacow: I mean, there are a lot of
potential things that could be done, which could be helpful on
the margin or not, depending on how far they are willing to think
about the possibilities.
Some of the easier changes to make would be changes to the loan
level pricing adjustments and the guaranteed fees, and mortgage
insurance premiums, which would lower the cost in the roughly 10
to 15 basis points. There are some other changes that could be
put through which we think from a legal side which would be much
more difficult to make retroactive. That would be either allowing
you to take your mortgage with you to the next house, which is
what we call portability. Or allowing you to transfer your
mortgage to the new home buyer, which is what we call
assumability. We think it's extremely difficult to make that
retroactive, but that could have some larger impacts, if that
were to go through.
Now, Jim, speaking of other impacts, mortgages spreads have
tightened 15 basis points. What does that do to some of the other
sectors that you cover?
James Egan: Right. We do think there is a
portfolio channel effect here that could be good for risk assets
broader than just the agency mortgage space, even though that is
clearly the primary impact of that $200 billion buying program.
Securitized credit, we think is one of the clear beneficiaries of
that tightening, given the relationships it has to agency
mortgages. The non-QM mortgage market in particular – one that
we're looking at for positive tailwinds as a result of
this.
Jay Bacow: All right, so we got a big
announcement. We got a pretty quick market move after that, and
now we're waiting to see what the next steps are. Likely going to
have a marginal impact on housing activity, but we got to keep
our ears and our eyes open to see what else might come. Jim,
always great talking to you.
James Egan: Pleasure talking to you too,
Jay. And to all of you regular listeners, thank you for adding us
to your playlist. Let us know what you think wherever you get
this podcast and share Thoughts on the Market with a friend or
colleague today.
Jay Bacow: Go smash that subscribe button.
*** Disclaimer ***
James Egan: It's a shame it's not a video
podcast. What a great cardigan.
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