Mortgage Rates Decrease Despite a Bond Market Sell-Off
If mortgage rates continue to fall, we should start seeing prepayments accelerate. Lately, it isn’t until rates hit the 3.8% level that prepays start kicking in.
The to-be-announced market allows loan originators to take individual loans and turn them into a homogeneous product that you can trade. Fannie Mae loans go into Fannie Mae securities.
The ten-year bond yield increased by three basis points, with yields increasing from 1.87% to 1.91%. Ginnie Mae TBAs picked up five ticks, while Fannie Mae TBAs lost two ticks.
European bond yields hit a record low on Monday, with the German Bund trading at a 7.5 basis point yield. US yields came back down on Friday after a pretty dismal durable goods report.
The Federal Open Market Committee meets on Tuesday and Wednesday this week. It will be the last FOMC meeting before we start worrying about rate hikes.
Being underwater doesn’t necessarily mean a borrower will stop paying—in fact, the vast majority of underwater homeowners are current on their mortgages.
As home prices rise, previously underwater homeowners gain the ability to refinance. This increases prepayment speeds.
February home prices grew 0.7% month-over-month, up 5.4% year-over-year. Prices are now within 2.9% of their April 2007 peak.
Investors have been switching out of Ginnie Mae TBAs and into Fannie Mae TBAs. Mortgage REITs are big users of TBAs and can quickly increase or decrease exposure.
When TBAs rally, it means capital gains for mortgage REITs. These gains increase TBAs’ returns, especially when added to their interest income.
With a focus to draw first-time homebuyers into the market, the government has announced measures to increase credit availability for new homebuyers.
Last week was a milestone in the European bond market, where the German Bund yield went below 10 basis points in yield.
There are basically two types of state foreclosure laws: judicial and non-judicial.
Refinancing activity affects prepayment speeds—a critical driver of mortgage REIT returns. When interest rates fall, those who can refinance at a lower rate do.
A drop in rates should spur more activity and make housing more affordable, even without home prices falling.
The refi boom dried up in late 2013, credit has been tight, and first-time homebuyers have been on the sidelines. If low rates are here to stay, 2015 could be a good year for origination.
Refinances have continued, driven mainly by home price appreciation and not interest rates. With interest rates falling, should REITs fear another refi wave?
QE has increased the size of the Fed’s balance sheet almost eightfold since the turn of the century, from just more than $500 billion in 2000 to $4.5 trillion currently.
Credit conditions are generally strong elsewhere, so there has to be something going on in the mortgage credit market. Regulatory conditions are making banks reluctant to lend.
After the March FOMC meeting, the Fed forecast that 2015 unemployment would come in at 5.2% to 5.3%, a drop of 5.2% to 5.3% from its forecast in December.
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