The end of forbearance and the capital markets

Money Mask

One of the great questions facing the housing markets in 2021 is what will happen when the mortgage forbearance programs under the CARES Act expire. When this act was originally passed on March 27, 2020, there were notable concerns that these measures would merely postpone an inevitable correction in the housing market once the programs expired.

Since that time however, a powerful fiscal and monetary response brought mortgage rates to a record low and boosted household savings. In addition, an increase in the prospects for ongoing work-from-home arrangements combined with a growing preference for less dense living arrangements has led to a massive boost in the number of families looking to move.

The result has been an extraordinary acceleration in home price growth. According to the Federal Housing Finance Agency purchase only house price index, it took almost six years during the bubble period from 1998 to 2004 for home price growth to accelerate from 5% to 10% on a year-over-year basis. In 2020 the same result took just five months, an extraordinary market impulse.

With prospects increasing for a new first-time homebuyer tax credit and student loan debt forgiveness in a decades-tight housing market, concerns have shifted away from a wave of foreclosures weighing on markets to an overshoot in prices and a subsequent hard landing.

How this will all play out depends to a large degree on developments in the mortgage market. Of course, the regular dynamics of the market are in play: Fed policy, changes in inflation expectations, etc. But the wonderful thing about the securitized mortgage market is the great variety of types of securities available to investors that allow them to allocate their capital based on nuanced views about future market developments. There are hundreds of thousands of pools to choose from, including those specified pools, custom pools from single-issuers, those containing loans made in single states, low balance loans or modified loans, along with a myriad of others.

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