Obama’s Mortgage Plan Faces Hitch as Market Boosts Rates

After the release of President Barack Obama’s plan to make housing more affordable by cutting mortgage-insurance premiums charged by a federal agency, bond investors responded by pushing up interest rates on the same loans.

The announcement caused Ginnie Mae-backed mortgage securities used by lenders to package and sell Federal Housing Administration-insured loans to fall the most since June. That boosted yields on securities that guide FHA borrowing costs to a greater degree than other mortgage debt, signaling a larger increase in rates on the loans for borrowers.

Investors sold Ginnie Mae bonds as the initiative threatens to increase supply and make it worthwhile for more homeowners to refinance existing loans. Prepayments on mortgage bonds trading for more than face value damage holders by returning their principal faster at par. Steady increases in FHA premiums in recent years proved a boon for Ginnie Mae investors, as they often locked borrowers into their mortgages even as rates fell.

Obama’s FHA plan is a “game changer” for the Ginnie Mae market, Scott Buchta, the head of fixed-income strategy at Brean Capital LLC, wrote in a note to clients. “It will most likely result in a sharp pick-up in refinancing activity.”

The annual fees the FHA charges to guarantee mortgages will be cut by 0.5 percentage point, to 0.85 percent of the loan balance, Julian Castro, secretary of Housing and Urban Development, said today during a conference call with reporters. Under the new premium structure, FHA estimates that 2 million borrowers will be able to save an average of $900 annually over the next three years if they purchase or refinance homes.

Ginnie Mae II 3 percent securities slumped 0.7 cent on the dollar to 102.9 cents at 4:57 p.m. in New York, pushing their yields up by 0.1 percentage point to 2.56 percent, according to data compiled by Bloomberg. Similar Fannie Mae bonds dropped 0.3 cent to 102.3, pushing yields up by 0.04 percentage point to 2.66 percent.

Additional cheapening of Ginnie Mae securities relative to Fannie Mae debt as the result of the announcement may reach as much as 2 times what occurred today, Credit Suisse Group AG strategists led by Mahesh Swaminathan wrote in a report.

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