Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates set record lows after the Federal Reserve said it would buy more U.S. government debt as its housing-bond holdings pay down.
Fannie Mae’s 30-year fixed-rate, current-coupon securities declined about 0.02 percentage point from yesterday to 3.43 percent as of 5 p.m. in New York, keeping pace with 10-year Treasuries after the Fed’s announcement, according to data compiled by Bloomberg. That’s down from this year’s high of 4.67 percent on April 5, and surpasses previous lows reached several times this year, most recently at 3.45 percent on July 30.
“From a mortgage market standpoint, it’s not a major event, except to the extent that Treasury rates rally, it will mean mortgage rates will follow,” Mahesh Swaminathan, a mortgage-bond analyst at Credit Suisse Group AG, said today in a telephone interview. The U.S. central bank’s decision wasn’t “really a surprise,” he said.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds rose to 0.66 percentage point more than 10-year Treasuries, little changed from before the announcement and up about 0.05 percentage point from yesterday, Bloomberg data show.
The Fed bought $1.25 trillion of so-called agency mortgage bonds and $172 billion of agency corporate debt through March 31 to support housing and financial markets. The mortgage holdings are set to pay down at a monthly pace of about $12 billion to $14 billion “over the next few months,” and in the range of $10 billion to $15 billion after that, Swaminathan said.
JPMorgan Chase & Co. analysts estimate that the Fed’s mortgage-bond holdings will pay down by about $217 billion over the next year if interest rates don’t rise or fall, which would change the amount of refinancing and home sales. The following year, the drop would slow to $158 billion, they say.
About $16 billion of the central bank’s portfolio of agency debt sold by government-supported Fannie Mae and Freddie Mac or government-charted Federal Home Loan Bank system will mature over the next six months, according to FTN Financial data. The yield spread between Fannie Mae’s benchmark five-year corporate borrowing and similar-maturity Treasuries was unchanged today at about 0.23 percentage point, according to Bloomberg data.
The Fed’s buying isn’t likely to spark increased mortgage refinancing except among homeowners with lower-rate loans taken out in the last year or two, many of whom are already set to take advantage of the lowest mortgage rates on record, Swaminathan said.
“Today’s announcement does not materially change our forecast for speeds, because we don’t see this creating a major movement in rates,” he said. The drop in yields may make a move in 30-year fixed-rate loan rates to 4.25 percent -- from about 4.5 percent now -- “more achievable,” which would accelerate refinancing, he said.
In recent weeks, “we have seen a decent increase in refinancing demand,” Luke Hayden, president of Mount Laurel, New Jersey-based PHH Corp.’s mortgage unit, the country’s seventh-largest home lender, said today in a telephone interview. “It was slower to emerge than you might have expected, but it seems to be sustained.”
At the same time, many borrowers are turning out to be unwilling or unable to refinance because of declines in home prices that have left them owing more than their property’s values, and because they face stricter standards on the documentation of their income and assets, he said.
“We see a lot of business owners down here, and they traditionally don’t show that much reported income, so we’ve run into a lot of trouble with that,” Garrett Clayton, chief executive officer of AmCap Mortgage Bank in Houston, Texas, said today in a telephone interview.
Many lenders are cautious about adding new staff to deal with increased application volumes because “we all know rates can only go in one direction: eventually higher,” Clayton said.
Mortgage originators have held back from lowering loan rates as much as secondary market prices would allow in part as a way to do “capacity management,” PHH’s Hayden said. That was especially true as lenders prioritized closing loans for home purchases ahead of a since-changed June 30 deadline for tax credits, he said.
Lenders may also be focusing less on special Fannie Mae and Freddie Mac refinancing programs for borrowers with little or no home equity because “from a productivity standpoint, it’s not nearly as lucrative as going with” traditional refinancing, Clayton said.