FOMC Minutes: Credit Conditions Ease, Mortgage Credit Is Tight
Credit conditions ease, but mortgage credit is tight
In the FOMC’s (Federal Open Market Committee) June meeting, members reviewed the financial situation. Members discussed the state of the credit markets and the interbank market. The Fed gets rough data on Treasury trading from primary dealers through its Desk Survey.
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Primary dealers trade Treasuries in the primary market. This means that they trade directly with the Fed. This is a lucrative business, but it also means they sometimes must trade with the Fed even when they don’t want to.
Credit conditions have improved
The FOMC minutes showed that the fears of any sort of financial contagion over the Brexit vote were overblown. This was the biggest event in credit markets over the intermeeting period. Stocks and bonds rallied during the intermeeting period and credit spreads tightened.
General credit availability for non-financial firms remained accomodative. Commercial real estate credit did tighten somewhat as credit quality deteriorated. Mortgage banking remains relatively accomodative. However, the market for non-agency, non-government, and non-jumbo loans remains more or less nonexistent.
Consumer credit remains relatively loose, although some in the auto loan sector have tightened credit a bit. That said, auto loans resemble subprime mortgages from the mid 2000s.
Implications for mortgage REITs
Tight credit conditions remain an issue for mortgage REITs. First of all, originators such as Nationstar Mortgage Holdings (NSM) have to contend with lower volumes than they would like. They’re stuck with portfolio loans that can’t be put in jumbo MBS (mortgage-backed securities), Fannie Mae, or Ginnie Mae securitizations.
Agency MBS REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) seem to be getting the majority of the flow due to the concentration on MBS guaranteed by the US government. Non-agency REITs such as Two Harbors Investment (TWO) are finding limited investment opportunities.
Investors who are interested in trading in the financial sector can look at the S&P SPDR Financials ETF (XLF). Investors who want to bet on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).