Mortgages and the COVID-19 Crisis (March 12, 2020)

Adam Shapiro: We know mortgage rates have gone down, but in the real world are most people we saw a surge of refinancing, seventy nine percent in the last report. Are they getting the low rate? Is anybody getting from a conventional bank conventional loan below 3 percent? Do you have to be a one percenter and have a private loan to get that kind of low rate? Yes. I think it's really more the latter.

Harris Trifon: I mean, it's pretty extraordinary to see the gap that we find right now between primary rates for mortgages versus where the secondary market is trading. That basis is almost at historically wide levels. I don't know anecdotally if you've tried to refinance your mortgage, but it's awfully difficult to get anybody on the phone right now. So I think our view is that we're certainly going to see a pretty dramatic increase in prepayment activity and that certainly has been priced into the market. However, the ramp, so to speak, might be a little bit longer than what many people expect right now.

Guest: Well, you know, just about every mortgage on the market is technically in the money.

Harris Trifon: That's correct.

Guest: But on the other hand, there's a stickiness that you just alluded to between the 10-year treasury and the actual mortgage rate, and they've been diverging. So this could be the best year the lenders have had in five years or areas of profitability. What do you think of volumes? We had a record year last year relatively, let's say nine years. Do you think we get above 3 trillion this year in terms of volume just on refi?

Harris Trifon: Yes, I do. I think it's going to it's going to be a little bit slow going. At least in the very immediate future, just given the volatility that we're seeing in markets today and over the last couple of weeks. But we do expect to see a pretty dramatic uptick in origination activity in the second half of the year.

Guest: Because in the third quarter, you actually saw refis go above purchase loans, which was not normal. You think we'll go higher this year?

Harris Trifon: Yes, absolutely. Absolutely.

Adam Shapiro: What do you think most people are getting? And I'm talking about the 30-year fixed rate. And does it make sense for a lot of people had mortgages that were around for three and three quarters. Does it make sense to refinance if you're only 50 basis points off of what people are getting?

Harris Trifon: You know, obviously, it's a personal decision to some extent. There are an enormous amount of expenses that are related to refinancing your mortgage. So, you know, in the end, it's obviously up to the individuals to decide. Until we see a little bit more stability, I think, in financial markets, until we see that basis that I described before, between primary rates and secondary rates begin to narrow and normalize, I would guess that for most people, it probably doesn't make sense right now to go ahead.

Julie Hyman: So Harris we've been talking mostly about mortgage rates in the context of the consumer, what about what does it mean for you? Because you guys are trading mortgage, right? Right. And providing that liquidity in the market. So what are you doing right now and then how will that then be a feedback loop and the market reaction to then what rates do?

Harris Trifon: Well, again, as I said before, the rates that we're seeing trading securities in the secondary market are substantially lower than what we're seeing in the primary market. So the bond market has already priced in a pretty substantial increase in refinancing activity even before this crisis that we're living through right now. So the market had actually been trading relatively weakly so far this year, even before the coronavirus impact really affected financial markets. That actually has remained true, which is a little counterintuitive. You traditionally think that government guaranteed mortgage bonds are a safe haven asset. You would expect to see in periods of heightened volatility like this, that market actually begin to firm up as capital flows into that market as well as U.S. Treasuries. That's not what we've seen at all. In fact, on Monday, when we had the dramatic sell off in equities, we actually saw mortgages trade very weakly. We're seeing a similar sort of dynamic today. So, you know, I think right now what we have is is a crisis of confidence. We have a lot of fear, obviously, that's pervasive in the market. And, you know, investors aren't really quite sure what to do as far as Western asset is concerned. We actually see a tremendous amount of value right now in the agency mortgage market. And we have been allocating more capital in our in our funds to that sector over the last number of months.

Guest: So it sounds like you're a little optimistic on prepayments. Maybe it won't be this much of a bloodbath for some investors as the bond market would suggest.

Adam Shapiro: All right. Harris Trifon, co-head of Mortgage and Consumer Credit and CIO of Western Asset Mortgage Capital Corp. Thanks for being here. Thank you.