MReport August 2020

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M R EP O RT | 19 EXPERT INSIGHTS The Government's Role in the Mortgage Market Frank Pallotta said the Federal Reserve has done a "great job" in providing liquidity and security to the mortgage market. F rank Pallotta recently won the Republican Primary in the 5th District of New Jersey for the U.S. House of Representatives. Pallotta gathered more than 50% of the total votes, capturing 19,077 votes—nearly 8,000 more than runner up John McCann. In 2008, he founded the Steel Curtain Capital Group—a mortgage advisory and consumer marketing firm that specializes in managing residential mortgage risks. Pallotta also held numerous roles in the financial industry, including stints at Goldman Sachs and Morgan Stanley. Pallotta spoke previously with MReport on the impact COVID- 19 could have on home sales in New Jersey, as well as delve into actions taken by the Federal Reserve and Treasury Department to stabilize the market. M // What are your thoughts on action taken by the Federal Reserve and the Treasury Department to try to stimulate the economy, specifically the Fed's decision to purchase mort- gage backed securities? PALLOTTA // The last two crises we've seen, including this one here, goes back to the financial crisis in 2008 and 2009. In both instances, I thought the Fed did a terrific job. And what I mean by that is whenever there is a time of crisis, the greatest thing, the number one thing that Fed should do is provide liquidity. They need to show the market that there's liquidity, and what they did back in 2008 and 2009 with TARP, where they injected liquidity into the system by way of lending money to the banks. This is a little bit different. They're providing liquidity, not just to institutions, but to individuals. It's a smart move by the Fed to create some level of confidence by injecting liquidity into the market. I also like that they came in initially and started to buy securi- ties. That's also another form of injecting liquidity into the market. It's unique that they did buy mort- gage backed securities, and I don't know if it was by design or it was intentional, but in the early stages of the crisis, you saw mortgage spreads blow out. When you started to see trea- sury rates come down substantial- ly, you also saw, initially, market rates go up and mortgage rates go up. The reason that was happen- ing was there was no ability, there was no liquidity specifically in mortgage product. When the Fed came in in the second round and started to buy mortgage securities, what that did is tightened the spread between mortgages and treasuries again, and that provided not just liquid- ity, but it brought rates down again, and it spurred on a little bit more lending. Right now, what we're seeing is decent liquidity in agency securi- ties, where I believe the Fed is buying. As a result, you're starting to see a lot more traction where we didn't see it about six weeks ago. You see a lot more traction in all mortgage product, except of course for more of the Alt-A or the non-QM product, which depends more on liquidity into the capital markets. I do think the Fed has done a great job. I think it was brilliant on their part to look to purchase a variety of securities, including mortgage backed securities. I think that helped preserve the spread and bring some activity back into the mortgage market. M // How can New Jersey's hous- ing market rebound following COVID-19, and what approaches can also be applied to the na- tional housing market? PALLOTTA // For starters, this is something that came about that no one had anticipated. I mean, we shut down our economy, we shut down a $22 trillion economy like that. You're going to see a number of industries really scale back, including housing. I did see the down 45% number, that sounds draconian to me. You will see numbers come off, but home sales, in my opinion, they fall for two reasons. First, is a lack of inventory, which we saw even coming into this crisis. I think when the crisis happened, you started to see people take their homes off the market. You see that coming where the lack of inventory leads to a decline in home sales. I do see it as temporary though. The other large factor, I would say in a decline in home sales is loss of jobs, which we're seeing. In New Jersey, I think we saw employment just tip the scales at a little over 15%. This I also see as temporary. So, when we're taking a look at what's going on with home sales, I do see them coming off, and I do see them as temporary. The counter to home sales coming off obviously is, in my opinion, home sale increases, and what we've seen, particularly with our proximity to New York City, the suburbs—off the charts. Prices are going up in the suburbs. I look at two factors when you look at home price activity, and one is the share of where homes are trading versus the offered price and the percentage of, rather how long a home is on the market. The percentage of offered price is approaching a hundred percent of offered price. That's near the historic highs. Right before the crisis, it was about 104%, and that just proves obviously that you had a very active and a robust purchase market. The other is we're seeing homes on the market for home sales inside of 45 days, which is also quick. And I think if you look at what you had mentioned earlier about year over year, home sales coming down, I think that's countered by a longer term trend of what I see as again, lower inventory, which creates an increase in home prices. Increase in home prices, I think creates a little more activity. "I do think the Fed has done a great job. I think it was brilliant on their part to look to purchase a variety of securities, including mortgage backed securities." — Frank Pallotta

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