Mortgage-Bond Market Roiled as Bernanke Report Fuels Speculation

Fannie Mae and Freddie Mac mortgage bonds that guide home-loan rates gained while those backed by high-cost debt declined on speculation the U.S. government may boost efforts to aid the housing market.

Yields on Fannie Mae’s current-coupon 30-year fixed-rate mortgage (MTGEFNCL) securities, or those trading closest to face value, declined about 4 basis points to 84 basis points more than 10- year U.S. government debt as of 3:30 p.m. in New York, the tightest spread since May 19, according to data compiled by Bloomberg. The company’s 6.5 percent securities, whose underlying loan rates average about 7 percent, fell almost 0.2 cent on the dollar to about 111 cents, Bloomberg data show.

The current-coupon bonds, which guide loan rates, extended this month’s gains relative to Treasuries after a report from Federal Reserve Chairman Ben S. Bernanke yesterday called the weakness in the housing market a “significant barrier” to U.S. economic health.

“The white paper increases the probability of QE3 centered on MBS as the paper emphasizes that housing is still a key problem with no easy solution,” Morgan Stanley analysts Vipul Jain, Janaki Rao and Zofia Koscielniak wrote today in a note to clients, referring to what would be the Fed’s third round of bond buying called quantitative easing.

The Fed paper also suggests a higher probability of an additional expansion to the Home Affordable Refinance Program, or HARP, for Fannie Mae and Freddie Mac borrowers with little or no home equity, the analysts said.

HARP Speculation

Refinancing damages holders of mortgage bonds that trade for more than face value by returning their principal faster at par.

Speculation about HARP changes was also fueled by a Jan. 4 note from Jaret Seiberg, a policy analyst at the Washington Research Group. He theorized that President Barack Obama could install a housing advocate at the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, after Obama named a head to the Consumer Financial Protection Bureau with a recess appointment, bypassing Senate opposition.

The White House has no plans for a new mass mortgage refinancing program, an administration official with knowledge of the matter said.

Yield spreads on Fannie Mae’s current-coupon securities have tumbled from almost 100 basis points, or 1 percentage point, on Jan. 2.

Sales of low-coupon bonds by mortgage originators was “light again” yesterday at about $1 billion, which is “less than the daily Fed appetite,” Walt Schmidt, a mortgage strategist in Chicago at FTN Financial, said yesterday in a note to clients. In October, the Fed began reinvesting proceeds from its holdings of housing-related debt into the mortgage-bond market.

High-coupon mortgage bonds aren’t underperforming “to an alarming degree,” Schmidt wrote today in a note.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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