Fed may start to cut, but mortgage rates follow their own rules


Investors and homebuyers can expect large swings in mortgage rates as the Federal Reserve Board of Governors eventually plans to cut mortgage purchases. But, like almost everything in the home loan business, things are not that simple.

The amount paid by the borrower can be as unique as the house they are buying. Nevertheless, there are usually key inputs that influence the direction of mortgage rates as well as the rates of the underlying assets. The two most important: the yield on the bonds that condition mortgages for investors and the potential profit from selling mortgages to those bonds.

At least for now, these two forces may be ready to pull in slightly opposite directions. According to Freddie Mac’s weekly survey, this can help keep mortgage rates relatively stabilized. The average 30-year fixed mortgage rate was virtually unchanged from the start to the end of the third quarter, at around 3%. Fannie Mae economists now predict that interest rates will stay roughly at the same level by the end of the year, hitting just over 3% next year.

One factor that could push mortgage rates up is that the yields on mortgage-backed securities issued by government-funded companies such as Fannie Mae and Freddie May are unusually close to those of the Department of Finance. Many analysts attribute this primarily to the Fed’s purchase of mortgage bonds launched in large numbers last year by the central bank as part of a series of measures aimed at thwarting uncertain markets deep in the pandemic. . .. This means that spreads can normalize, pushing mortgage yields even faster than Treasury yields. This puts upward pressure on mortgage rates as mortgages are sold to these vehicles.

But there is a counterweight. Mortgage lenders can absorb some of this pressure without giving the borrower everything in the form of higher interest rates. During many pandemics, mortgage originators have been very profitable and have made an unusually high margin by selling qualified Fannie Mae or Freddie May mortgages in the fixed income market. The alternative is a spread between the 30-year fixed mortgage rate and the yield on the mortgage-backed security.

The spread was much wider in 2020 as homeowners rushed to take advantage of low interest rates for refinancing. The increase in demand meant that lenders had the advantage of pricing. It takes time for originators to hire enough people to cover demand, which limits the supply of mortgages.

As interest rates rise and the pool of people eligible for mortgage refinancing shrinks, their capacity becomes excess. The demoulding process takes time. Spreads narrowed over the year, but are still higher than they often were in the years leading up to the pandemic.

Bose George, analyst at KBW, said: “For at least the next few quarters, much of the impact of the decline can be felt by lenders rather than borrowers.

Not only that, Rocket Cos. The recent emergence of large, publicly traded initiators such as UWM Holdings and LoanDepot has provided diversification and scale to reduce marketing, technology, and other lending costs. Even in the face of tighter spreads, companies can continue to struggle for volume and market share. Bose said the spreads could be well below average during times of fierce competition. This is what we expect from KBW in 2022.

There is also reason to believe that mortgage yields could continue to trade relatively close to Treasury yields after rising slightly recently. In addition to the Federal Reserve, the deposit-flooded banks were big buyers of mortgage bonds. Satish Mansukhani, a mortgage-backed securities strategist at Bank of America, said about $ 6 trillion in government mortgages over $ 8 trillion is “trapped” by the federal government and the United States. banks.

“The outlook is relatively stable,” he says. “Even if the Fed pulls back, it will take time for the market to price it.”

There are other ways to keep home buying and refinancing relatively affordable and the originator’s volume even when mortgage rates rise. Government-sponsored companies such as Fannie Mae and Freddie May can help. Part of what determines the amount an originator can sell a mortgage and the associated rate to charge is the cost of securing the debt with the GSE. GSE has already ended pandemic fees aimed at offsetting the higher risks. The Biden administration may also seek other ways to reduce fees or other barriers for a particular borrower to promote affordable housing.

A wild card: if house prices continue to rise, some are supported by low interest rates. This may be a factor influencing the Fed’s opinion on how aggressive it should react to rising asset prices. Higher prices can increase housing supply, but otherwise, if the Fed’s cut turns into bond sales or if interest rates start rising much faster, simple things can happen to mortgage rates. . There is sex. ..

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Fed may start to cut, but mortgage rates follow their own rules

Fed may start to cut, but mortgage rates follow their own rules

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