While many of us in the financial services industry turn our sights to 2023, there is still much to be learned from a tumultuous 2022. After a period of relative financial calmness, volatility returned in a big way in 2022, and for the most part, did not let up. The U.S. mortgage market was significantly impacted by these risk factors, and we now find ourselves face to face with high interest rates, soaring home prices, low mortgage volumes and inflation.
It can be tempting to compare today’s market conditions to those of 2007, which led to the fall of the mortgage market, the financial crisis of 2008 and subsequent property collapse in 2009. However, there are some major differences between these times, namely a difference in the quality of borrowers, which indicates a “collapse” is far from imminent.
What then can we take from a year marked by volatility and uncertainty? From my perspective, the U.S. mortgage market, and investors in the mortgage secondary market, will have hopefully learned a few key lessons about risk that they would be wise to remember as we look forward to 2023:
1. No one has a crystal ball, markets are unpredictable and risks are interconnected.
2022 had some major unpredicted geopolitical events which rocked the U.S. mortgage market. The conflict in Ukraine that erupted in late February and the U.K. gilt sell-off of October took the world by surprise and, in turn, disrupted the mortgage market. In a modern world, global markets and geopolitical factors are highly integrated; the U.S. mortgage market is impacted by more than just the U.S. So, when considering risk factors, it’s important to consider unforeseen impacts on the world and global economy, which will impact the U.S. mortgage market as well.
2. Don’t let market moves totally influence your risk management decisions.
There were many surprise events in 2022 that swayed the mortgage market. However, each move individually shouldn’t impact your risk management decisions. May’s and August’s upside CPI numbers greatly disrupted the Treasury market. After a few weeks, with the Fed reestablishing credibility, the Treasury market normalized again. In addition, companies have been making technological upgrades and advancements to cope with these market moves and continue to provide competitive pricing in the mortgage market. So, each dip in the market shouldn’t influence your risk management decisions, especially considering the greater advancements being made by companies. Risk decisions should be made based on broader, longer-term factors.
3. A consistent Fed, anchored by clear, consistent communication, is crucial.
The biggest driver of these market moves was the Fed. The mortgage market does not like surprises when it comes to the Fed. Given the amount of influence they have, knowing what they’re going to do and say is crucial. What is most important with the Fed is consistent communication. This is where 2022 differs greatly from the taper tantrum of 2013. In any efficient market, where interest rates can significantly impact major world economies, central bank actions need to be clearly communicated and carefully coordinated. There’s a unique aspect to the mortgage market: There was a buyer that was always there—the Fed.
Due to this change in Fed policy, communication is key for reassuring investors. And the Fed has been successfully keeping up with this part. One of the biggest perils associated with the Fed is overshooting the market and raising interest rates too much. With this, hindsight is key. Up until March of 2020, the Fed’s balance sheet sat at $1.4 trillion, not noteworthy by historical standards. If the Fed had $700 billion less on the balance sheet in 2021, today’s market positioning would be drastically different and less concerned about the risk of overshooting the market.
Overall, 2022 had several unforeseen risks that greatly impacted the mortgage market. While no one had a crystal ball to predict them, investing in technology and a sound risk management system can help lessen the impact of a crisis. Ultimately, each individual risk and subsequent market move also shouldn’t greatly influence major risk decisions. It is most important to watch larger risks and recognize the importance of factors like the Fed when factoring risk into mortgage market decisions.
No one can be sure what’s in store for 2023, but remembering these major lessons from 2022 will certainly help when preparing for, managing and thriving during periods of volatility and increased risk.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.