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.
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.
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 Backow, co-head of securitized products research at Morgan Stanley.
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 US housing markets.
It's Tuesday, January 20th at 10 a.m. 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?
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 here.
The market was probably expecting the GSEs to buy about $100 billion of mortgages this year.
So this is maybe an incremental $100 billion 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 Besant 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 for the first time since 2022 on some mortgage measures.
All right, 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?
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 in hedging the duration, like historically the GSE's 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's 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 and spreads and in mortgage rates.
But Jim, what does this mean to the mortgage market writ large?
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% 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 575 in the back half of this year.
This would take that forecast down to about 5.6%.
That has a very modest upward trend 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, maybe as high as 4.3 with some media effect layered in.
But any growth in demand, when we think about the home price side of the equation, we think will be met with additional listings.
So it really doesn't change our home price forecast for 2026, which was plus 2%.
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 growth in sales, 2 growth in home prices.
The risk has always been to the upside.
That could be because demand responds more to a 5 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?
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 low-level pricing adjustments and the guarantee 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, 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?
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.
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.
Pleasure talking to you too, Jay.
And to all of you regular listeners, thank you for adding us to your playlist.
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It's a shame it's not a video podcast.
What a great cardigan.
