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US presidents, especially Republican ones, like to champion home ownership as an essential component of the American dream. Donald Trump, too, has pushed policies in this vein.
But Trump’s quixotic policymaking — particularly last week’s assault on global trade — seems likely to lead to higher unemployment, higher inflation and generally tougher times for the US consumer. So you might expect the housing market — and the mortgage market that underpins it — to suffer, too.
In the short term, the opposite may be true. As Trump’s tariffs freak out world leaders and global stock markets, they have triggered a knee-jerk flight to safety, with investors ironically diverting their money into US Treasury bonds, issued by the very government that caused the crisis of confidence. That has lowered US Treasury yields substantially — 10-year bonds are now paying below 4 per cent, down from a 4.8 per cent January high — as well as the mortgage rates that are priced off them.
Simultaneously, there is a certain bullishness around some lenders. Appropriately enough perhaps for a group that calls itself “the world’s most optimistic company”, leading lender Rocket last week announced the acquisition of Mr Cooper, a rival, in a $9.4bn deal. US equities overall have traded sharply lower following Trump’s tariff announcements. But Rocket — valued more like a technology company than a traditional lender, thanks to its artificial intelligence-assisted digital platform — has seen its stock jump about 20 per cent since the start of last week.
Across the mortgage market, though, there are obvious causes for concern. Combined foreclosure and delinquency rates are edging up. They are still below 2 per cent, far short of the 5 per cent peak of the Covid era and the 10 per cent tally that followed the 2008 global financial crisis. But worsening US economic forecasts bode badly: interest rates may have to rise again to counter higher inflation.
Also noteworthy is that most of the big mortgage lenders these days are funded by junk-rated paper. (Rocket’s rating by Fitch was the exception, though that investment-grade rating was put on negative watch as a result of the extra leverage it would inherit via the Mr Cooper deal.) Deposit funding has been gradually discredited by the kind of withdrawal runs seen in 2008 right up to the 2023 demise of Silicon Valley Bank. But if bond market access becomes excessively expensive that could prove just as problematic for a functional mortgage market.
Regulation provides little reassurance. Today’s dominant lenders — from Rocket to United Wholesale Mortgage — are relatively thinly capitalised, benefiting from a light-touch regulatory regime for non-banks compared with tougher post-crisis capital demands on the banking sector.
Yet this is actually a pretty low-risk market. Mortgages, underpinned by the ultimate collateral of bricks and mortar, are normally the safest form of consumer lending. And in the US context, that is all the more true because credit risk is only fleetingly present on lenders’ balance sheets.
The vast majority of US mortgage assets are repackaged into mortgage-backed securities. Rocket says its securitisations are particularly rapid, with some loans only staying on its balance sheet for one to two weeks.
The risk, such as it is, then passes to investors in MBS products, typically the big banks and insurers. But most of these products are derisked, too, thanks to government guarantees on “agency” MBS underpinned by the likes of Freddie Mac, Fannie Mae and Ginnie Mae.
Back in 2008, as investors became drawn to the high returns from securitisations, the market created more and more non-agency higher-yielding MBS products. That fuelled more and more poor-quality mortgage lending to sate investor appetite — right up to the market’s infamous implosion.
Today the appeal of higher-risk non-agency MBS seems to be growing again: issuance is at its highest level since 2008, though at 8.4 per cent of the total, compared with a tally of more than 50 per cent in the run-up to the crisis, it remains low.
In other words, the US government is underpinning, directly or indirectly, more than 90 per cent of mortgage risk. The market structure of the US home loan — that American dream essential — may or may not be imperilled by Trump’s economic iconoclasm. But it’s a long way from the small government to which Republican presidents of all hues have always cleaved.
patrick.jenkins@ft.com
