Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates reached the highest in three months relative to 10-year Treasuries as investors speculate that supply may grow as homeowner refinancing rises.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds rose 0.05 percentage point to 0.91 percentage point more than 10-year Treasuries as of 5 p.m. in New York, reflecting the widest spread since May 24, data compiled by Bloomberg show. The gap reached a record low 0.54 percentage point on July 30.
More homeowners may be able to refinance if bond yields stay low, encouraging lenders to expand their capacity to process loans and creating more competition that would drive record-low rates down even further, according to analysts from JPMorgan Chase & Co., Bank of America Corp. and Amherst Securities Group. While some of the issues limiting refinancing can’t be overcome without government-rule changes, lenders have room to offer better rates, Amherst said yesterday.
“We expect some of those frictions to be eliminated over time, and speeds to rise somewhat,” the New York-based analysts led by Laurie Goodman wrote in a report. “While the Fed is using quantitative easing to jump start the economy, the largest institutions have not done their part to facilitate the implementation.”
It’s “inevitable” that new competitors will enter the market, pressuring existing ones, and that “the supply of refinance-able borrowers will burn out, driving originators to lower rates as they compete for more business,” they said.
Treasuries Rally
Yields on the Fannie Mae securities fell 0.06 percentage point to 3.4 percent, lagging a rally in Treasuries after an industry report showed sales of existing homes tumbled in July, bolstering concern the economy is faltering, Bloomberg data show. Yields on the Fannie Mae debt are up from a record low 3.39 percent on Aug. 16 and down from this year’s high of 4.67 percent on April 5.
Spreads today reached their second-highest level since early November. At that time, spreads were falling toward record lows as the Federal Reserve purchased $1.25 trillion of home- loan bonds.
Even though 30-year mortgage rates fell to a record low 4.42 percent last week, the decline hasn’t kept pace with the slide in yields on bonds backed by the loans, showing that lenders’ profits may be gaining as they hold off offering the lowest possible rates to better match their application volume with capacity to process the paperwork.
Spread Widens
The difference between the yields on Fannie Mae’s current- coupon securities and average rate on a typical 30-year fixed- rate loan last week rose to about 1 percentage point, from about 0.60 percentage point at the start of the year and an average of about 0.45 percentage point over the past decade, according to data compiled by Bloomberg.
The larger gap, caused partly by the thinned ranks of originators after U.S. housing slumped, is helping to limit refinancing and may narrow if lenders hire or reallocate staff as rates remain low, according to analysts at Amherst, JPMorgan and Bank of America.
While “many smaller and nimbler lenders may be actively adding capacity to take advantage of current rates,” among the top lenders “we found that only a handful are aggressively trying to do the same,” JPMorgan analysts led by Matt Jozoff in New York wrote in an Aug. 20 report. “Though one can’t be complacent about industry capacity, we believe that this will be a gradual process, taking months rather than weeks.”
Unfair Regulation
One challenge to hiring among mortgage bankers is a rule created this year that requires loan officers to be licensed by states, a regulation that can create months of delays, according to Michael Moskowitz, president of New York-based lender Equity Now Inc. It’s also unfair because it doesn’t cover the home-loan divisions of banks, he said.
“I assure you the loan officers working for the federally insured institutions don’t have any higher ethical standards than my people,” Moskowitz said in an Aug. 11 telephone interview.
Refinancing is set to boost the total supply of the $5.2 trillion of so-called agency mortgage bonds trading in the market by about $35 billion to $45 billion a month, largely by paying off debt now held by the Fed, according to JPMorgan. At current rate levels, pay-downs on the Fed’s portfolio will exceed $250 billion over the next 12 months, and could exceed $300 billion if rates fall another 0.25 percentage point, they said.
‘Refinancing Wave’
The Fed said Aug. 10 that it would buy Treasuries with the proceeds from repayments on its holdings of mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae to support the economy.
Bank of America analysts led by Christopher Flanagan wrote in an Aug. 20 report that “there is significant risk that we are on the cusp of a classic refinancing wave, where the magnitude of the wave once again surprises the MBS market to the upside and mortgages underperform.”
Rates below current levels could help more borrowers refinance in part by enabling lenders to offset upfront fees of as much as 2 percent of balances imposed by Fannie Mae and Freddie Mac for the riskiest loans, according to the Amherst report. Originators can cover those fees by making loans with rates about 0.75 percentage point higher than their base levels, the analysts said.
Underwriting Quality
Reductions to the Fannie Mae and Freddie Mac fees is a more likely revision that may boost refinancing than changes to the mortgage-finance companies’ requirements on underwriting quality, Amherst said. Fannie Mae and Freddie Mac borrowers with private mortgage insurance are also unlikely to obtain greater ability to roll over the guarantees to new loans when the debt exceeds their homes’ values, they wrote.
Agency mortgage bonds, which return principal to their investors every month, may do worse than Treasuries as longer- term debt continues to outperform short-term debt on concern that the economy is slowing, the Bank of America analysts wrote.
“Although we had it as a risk scenario for mortgages, we are as surprised as many others by the velocity of the move,” they said, recommending that investors hold less home-loan debt than found in benchmark bond indexes.
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net;
Rate These Stories
Rate this Page