The S-Curve

Mortgages at SFVegas 2023

Richard Cooperstein

The Structured Finance Association hosted SFVegas 2023 (February 26 - March 1), a broad capital markets conference with thousands of attendees in Las Vegas.  Andrew Davidson & Co. Inc. (AD&Co) was a sponsor focused on the mortgage sector.  As we engaged with clients and policy leaders, a few themes emerged: Data, Expanding Access Safely, Ginnie Mae Servicing and Auto Loan Performance.


Well-managed data is the underpinning of well-run mortgage organizations, supporting efforts to manage risk, profitability, and compliance.  Data is essential to developing new products, improving accuracy, and expanding access to mortgage finance.  Nearly everyone we spoke to spends time and money on data and still struggles to manage it through their internal operations, from loan level acquisition to portfolio management and reporting.  They expend additional effort to acquire and pass on data in the larger mortgage ecosystem.  The richness and reliability of data degrade even within companies, let alone as mortgage-related assets pass through the value chain.  This degradation worsens the information asymmetry between sellers and buyers, increasing risk and pushing the mortgage business further from an efficient market.  It impedes adding new data to the data-frame, such as the new Trended Credit Scores or expanded data generally, that helps expand markets.

These realities align with the economic theory of imperfect markets and utilities.  Markets that provide gains from scale and consistency have attributes of public utilities.  Adding privacy concerns and positive systemic value beyond individual mortgage transactions do as well.  Reducing the inherent information asymmetry between sellers and buyers further suggests that the efficient market outcome could be a regulated market utility of loans and related data.  Data aggregators can supply to the utility, and data consumers can access it.

Expanding Access Safely

Safely expanding access to mortgage finance is not automatic.  The legacy of discrimination generally and in housing finance specifically, shows up in the persistently lower homeownership rates of minority populations.  Homeownership rates can be expanded temporarily by lowering standards and raising risk, or durably by using new data that lowers risk.  Making progress requires commitment and solving the data market failure described above.

Ginnie Mae Servicing

It’s well known that compliantly servicing non-performing loans can cost several times the fixed servicing fee and thus pose systemic risk.  During the Pandemic, Federal agencies scrambled to provide financing and reduce the burden on non-bank servicers that represent a substantial majority of the Ginnie Mae market without the federal backing that most of the mortgage ecosystem enjoys.  This cost-revenue imbalance is not an advancing issue and cannot be solved by transferring the burden of advancing NPL payments to bond holders.  The market bid for Ginnie Mae servicing in mid-2020 was zero because of the expectation of high NPL rates.  Fortunately, record low mortgage rates and record refinancing volume provided servicers who were also originators with cash flow to offset the cost of servicing FHA NPL rates that temporarily reached 14%.  The next time there is a systemic rise in delinquency rates, this extra cash flow is unlikely.

What’s the solution for this?  The most straightforward solution is a variable servicing fee that aligns revenues with expenses, but there is surprisingly little enthusiasm for this solution.  Ginnie Mae’s leadership is clearly aware of the systemic risk potential and is seeking a solution.  The U.S. mortgage market often uses a federal backstop behind private financial markets to provide the stability the economy depends on.  The backstops of deposit insurance or for the GSEs are examples.  We will be studying this issue.

Auto Loan Performance

For the first time in awhile, attention is being paid to rising auto loan delinquency rates, both prime and subprime.  Ordinarily, today’s historically low unemployment rate would associate with low delinquencies, so this rise is worrisome.  It’s well-known that supply-chain disruptions during the Pandemic caused spikes in new and especially used car prices.  Cars financed at those high prices pose more risk, and used car prices have already dropped about 15% from their peak.  AD&Co will be monitoring this performance and refining our models.