Credit conditions ease, but mortgage credit is tight
In the FOMC’s (Federal Open Market Committee) review of the financial situation, the Fed discusses the state of the credit markets and the interbank market. The Fed gets rough data on Treasury trading from the Desk’s Survey of Primary Dealers.
Primary dealers trade Treasuries in the primary market. This means they trade directly with the Fed. This is a lucrative business, but it also means they sometimes must transact with the Fed, even when they don’t want to.
The FOMC considered credit conditions “generally accomodative” for large non-financial firms. Corporate bond issuance increased, but most of the activity was in investment-grade paper. Financing for the commercial real estate sector remained “broadly available,” and the Fed noted that the growth of commercial and industrial loans “remained solid.” Credit spreads did widen, however.
On the mortgage side, the Fed said that credit remained tight for borrowers with lower credit scores, but credit conditions are increasing gradually. The Fed also noted that liquidity conditions have deteriorated in most bond markets. They’re driven primarily by a decrease in the willingness of banks to provide market-making services due to Dodd-Frank regulations. Mortgage rates increased with interest rates, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT).
Given that credit conditions are generally strong elsewhere, there has to be something specific going on in the mortgage market. Regulatory conditions are making banks reluctant to lend outside of government-backed mortgages and low LTV (loan-to-value) and high FICO (Fair Isaac Corporation) jumbo loans.
Tight credit conditions remain an issue for mortgage REITs. First originators like Nationstar (NSM) have to contend with lower volumes than they would like. They’re stuck having to portfolio loans that can’t be put in jumbo MBS (mortgage-backed securities) or Fannie Mae or Ginnie Mae securitizations.
Agency MBS REITs like Annaly Capital (NLY) and American Capital Agency (AGNC) seem to be getting the majority of the flow due to the concentration on MBS backed by mortgages guaranteed by the U.S. Government. Non-agency REITS like Two Harbors (TWO) are finding the menu of investment opportunities limited.