October 8th, 2021 4:34 PM by Jackie A. Graves
Despite increasing talk about interest rates and home prices, mortgage rates for now are likely to stay relatively steady.
Investors and homebuyers may expect large fluctuations in mortgage rates, as the Federal Reserve Board of Governors eventually plans to reduce mortgage purchases. But, like almost everything in the home lending business, things aren’t that simple.
The amount paid by the borrower can be as unique as the house they are buying. Still, there are usually some key inputs that influence the direction of mortgage rates as well as underlying asset rates. The two biggest: the yield on bonds that package mortgages for investors and the potential profit from selling mortgages to those bonds.
At least for the time being, these two forces may be ready to pull in slightly opposite directions. According to Freddie Mac’s weekly survey, this can help stabilize mortgage rates relatively. The average 30-year fixed mortgage rate remained almost unchanged from the beginning to the end of the third quarter, at around 3%. Fannie Mae economists now predict that interest rates will remain at about the same level by the end of the year, reaching just over 3% next year.
A factor that could push up mortgage rates is that yields on mortgage-backed securities issued by government-sponsored companies such as Fannie Mae and Freddie May are unusually close to those of the Ministry 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 steps to thwart uncertain markets deep in the pandemic. What this means is that spreads can normalize, pushing mortgage yields even faster than Treasury yields. This puts upward pressure on mortgage rates as mortgages are sold to those vehicles.
But there is a counterbalance. Mortgage lenders can absorb some of that pressure without giving it all to the borrower in the form of higher interest rates. During many of the pandemics, mortgage originators were very profitable and earned an unusually large margin by selling Fannie Mae or Freddie May qualified mortgages to 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 scrambled to take advantage of low interest rates for refinancing. The surge in demand meant that lenders had the leverage of pricing. It takes time for originators to hire enough people to cover demand, limiting the supply of mortgages.
As interest rates rise and the pool of people eligible for mortgage refinancing shrinks, their capacity becomes oversupplied. The shakeout process takes time. Spreads have narrowed during the year but are still higher than they often were in the years prior to the pandemic.
Bose George, an analyst at KBW, said: “For at least the next few quarters, much of the tapering impact can be felt by lenders rather than borrowers.
Not only that, Rocket Cos. The recent emergence of large publicly traded originators such as, UWM Holdings and loanDepot has provided diversification and scale to reduce marketing, technology and other lending costs. Even in the face of narrower spreads, companies may be able to continue to fight for volume and market share. Bose said spreads could be well below average during periods of fierce competition. This is what we expect KBW to occur in 2022.
There is also reason to believe that mortgage yields may continue to trade relatively close to Treasury yields after a slight increase recently. In addition to the Federal Reserve, banks flooded with deposits were big buyers of mortgage bonds. Satish Mansukhani, mortgage-backed securities strategist at Bank of America, said about $ 6 trillion of government mortgage outstanding balances of over $ 8 trillion are “trapped” by the federal government and banks.
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“The outlook is relatively stable,” he says. “Even if the Fed recedes, 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 as mortgage rates rise. Government-sponsored companies such as Fannie Mae and Freddie Mac may help. Part of what determines the amount an originator can sell a mortgage and the associated rate to charge is the cost of guaranteeing debt with the GSE. GSE has already terminated pandemic fees aimed at compensating for higher risks. The Biden administration may also seek other ways to reduce fees or other hurdles for a particular borrower as a way to promote affordable housing.
One wildcard: If home prices continue to rise, some are backed by low interest rates. This can be a factor influencing the Fed’s view of how aggressively it needs to respond to rising asset prices. Higher prices can increase housing supply, but otherwise, if the Fed’s taper turns into bond sales or interest rates start to rise much faster, simple things can happen to mortgage rates. There is sex.
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