As everyone who attended the MBA National Mortgage Servicing Conference & Expo returns to their desks, we look at the continued uncertainty of the Residential Mortgage Backed Security market (RMBS). What looks like a comeback for 2017, based on rising interest rates, may be temporarily stalled as the Federal Open Market Committee decided to keep the Fed Funds rate at 0.75 percent at the January 31-February 1 FOMC meeting.

Although not an unforeseen outcome, it causes the market to lose confidence in the Fed’s publicized goal to impose three quarter-point increases in 2017 if unemployment and inflation remain under control.

As a part of its quantitative-easing program, the Federal Reserve has also indicated an intention to begin reducing the $1.75 trillion they hold in mortgage-backed securities. Bloomberg reported that some officials predict the sell-off could begin as early as this year. The Fed continues to purchase most of the TBA MBS production and is the largest purchaser of RMBS, with holdings representing a third of the mortgage market.

Although the Fed may simply reduce MBS purchasing, any serious talk indicating a change to current U.S. monetary policy potentially reduces demand. To add to market uncertainty, the industry is now reacting to the February 14 and 15 testimony of Fed Chair, Janet Yellen.

As a part of prepared remarks for the semi-annual congressional testimony, Yellen stated “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”

With an uptick in interest rates, coupled with Fed-speak, it is reasonable to assume that the RMBS market will make a comeback in the near future. Rising interest rates, although reducing credit availability and housing demand, could help to bolster a purchase market and would certainly stimulate RMBS trades.

Banks, which have held more loans in portfolio, would be incentivized to sell longer term fixed-rate loans, subsequently improving the presence of private investors in the MBS market and stimulating an increase in trading. Additionally, with the changing administration the market may see a pullback in the robust issuance of Fannie Mae and Freddie Mac securities, creating even more opportunity for private-label securitization.

The impact of this market environment on servicers has its pros and cons. Rising interest rates decreases refinance activity and therefore reduces prepayment speeds; however, declining prepayment speeds historically results in an increase in MBS default risk.

As more and more servicers leverage this expansion in opportunities, they need to be prepared to manage the fall out and have technology that will facilitate change. This scenario would have a greater likelihood of affecting clean post financial crisis MBS, where lower interest rates and lower loan-to-values are more common. On the heels of the HAMP sunset, extensive loan modification guidance and new administration promises to repeal regulation, the last thing servicers need is increased defaults.

The return of the RMBS market, as well as rising interest rates, is certainly on the horizon. Albeit mostly positive, continued change in the mortgage market necessitates servicers keep their sites on the future of their business, particularly loss mitigation.

Innovative automated solutions that support loss mitigation qualification, eligibility and exception determination will provide servicers with the flexibility and control needed to quickly respond to today’s changing environment in a compliant, cost-effective manner, now and in the future.

Jane Mason, Founder and CEO

Jane has applied her vast experience (over 25 years) operating process-driven businesses to successfully redefine client-focused service. Jane has worked with expert programmers to apply cutting-edge web-based technology to automate complex processes in industries such as Financial Services, Healthcare and enterprise workflow. Her vision confirms Clarifire's trajectory as a successful, scaling, Software-as-a-Service (SaaS) provider. A University of South Florida graduate, Jane has received many awards related to her entrepreneurial skills.