Bond Market Rally Keeps Party Alive for U.S. Mortgage Bankersby
With U.S. mortgage rates near their lowest level since April and showing signs of falling further, some lenders are preparing for another refinancing wave, an unexpected development after the Federal Reserve began hiking short-term interest rates in December.
Borrowing costs on home loans, which are closely linked to longer-term bond yields, could fall after U.S. Treasury prices jumped on Tuesday. Last week, a 30-year mortgage cost 3.64 percent, up a touch from the week before but down 0.37 percentage point from the end of last year. If rates edge a bit lower, about half of the more than $5 trillion of home loans that get bundled into government-backed securities could be eligible for refinancing, according to Sarah Hu, a senior mortgage strategist at BNP Paribas.
Few expected another refinancing boom after the Fed started lifting short-term borrowing costs in December. But longer-term yields in the bond market have been plunging this year as money managers seek shelter from sinking stock markets and from slowing growth in China, underscoring the limits of the central bank’s power as it tries to normalize lending costs.
“It’s incredible that mortgage rates are plummeting,” said Ted Tozer, president of Ginnie Mae, a government-backed housing company that guarantees $1.6 trillion of mortgage securities. He added that he wouldn’t be surprised if 2016 beat Ginnie Mae’s 2013 record volume of $464 billion for overall loans guaranteed.
More mortgage refinancings could be a boon to earnings at lenders including big banks, but could hurt investors in securities backed by home loans.
On Tuesday, the 10-year Treasury yield fell 0.08 percentage point to 1.83 percent, the biggest decline in more than two weeks. If mortgage rates fall by about 0.15 percentage point from current levels to around 3.5 percent, another 2.1 million borrowers would be able to refinance. That would bring the total number of loans eligible to around 8.8 million, or nearly 20 percent of loans, a report from data company Black Knight said on Tuesday. There haven’t been that many loans eligible for refinancing since 2012-13, when rates were at historic lows.
The Mortgage Bankers Association, a trade group, has increased its projections for refinancing. In the middle of December, it expected $415 billion of loans to be refinanced this year, but in mid-February, its forecast was 25 percent higher, at $520 billion.
Lenders Gear Up
Private lenders are also gearing up for more business.
“It’s clear, we’re seeing a high level of refinancings beyond what initial projections were," said Sean Grzebin, head of retail mortgage banking for JPMorgan Chase & Co.
“This could be a near-term boon,” said Chris Abate, chief financial offer of mortgage company Redwood Trust, which focuses on loans to homeowners with strong credit that are too big to be backed by government programs. "We’ll have to see how it impacts our volumes but it’s a good sign."
Refinancing activity tends to be the most sensitive to shifts in rates, but purchase volume may also increase as rates fall.
Forecasting rates is notoriously difficult, and mortgage costs may not fall much from here, or may drop below 3.5 percent only briefly. Many borrowers already refinanced when rates were low in prior years, including 2012 and 2013, which could damp the current wave. On Wednesday, Treasuries took back some of Tuesday’s gains, with yields on 10-year notes rising to 1.86 percent.
While refinancings are a positive for borrowers, they threaten to wallop investors managing mortgage bonds, which suffer when rates lurch unexpectedly.
Few money managers have protected themselves for rates heading downward. “Low rates certainly puts us at risk” of faster prepayments, said David Finkelstein, chief investment officer for agency and residential mortgage bonds at Annaly Capital Management Inc., which calls itself the world’s largest mortgage real estate investment trust with some $75 billion in assets under management.
As long as mortgage rates remain above 3.5 percent, refinancing activity will probably stay muted, said Scott Buchta, head of fixed-income strategy for brokerage Brean Capital LLC.
Still there’s a good chance that average 30-year rates will fall below that threshold, he added. “We are so close to that level, you can taste it,” he said.