I wanted to give everyone an update on recent events in the bond market. Mortgage rates are determined by investors in FNMA and FHLMC mortgage bonds. These bonds trade in their own market and are separate from US Treasury securities. Over the past few years, credit losses on mortgage securities have been very low. As a result, prices for mortgage securities have been highly correlated to US Treasuries. Over the past few weeks, mortgage prices and US Treasury prices have not been correlated. This is referred to as "spread widening." That means the yield required by mortgage investors becomes relatively higher than the yield required by US Treasury Investors. For example, today the 10 year US Treasury Note is up 16/32 nds or .5 points. Mortgage securities are up 1/32 or .03125 points. If the markets were normal, mortgage securities would be up 8/32 nds or .25 points.
Why is this happening? There are several reasons but the biggest reason is that FNMA and FHLMC are experiencing unprecedented losses in their portfolio. FNMA's stock price has declined 60% over the past 60 days. FNMA and FHLMC are the two largest buyers of mortgages. They also borrow money to finance the loans they purchase. Most of the money that FNMA/FHLMC borrows is from foreign investors. With mounting losses, those investors are demanding higher yields to compensate for risk. As a result, FNMA and FHLMC are not willing to pay as much for the mortgages they buy. This is keeping mortgage yields relatively high.
Prices on other mortgages are also widening. GNMA mortgage securities which accept FHA and VA loans are only up 4/32nds. They should be up 9/32nds with the 10 Year US Treasury up 16/32nds.
In this environment, it is difficult to figure out what mortgage securities will do next. It may be helpful to let your customers know that the Federal Reserve and the US Treasury market are separate from the mortgage bond market. Hopefully this will allow you to address expectations when they read that "rates" are falling.
Please feel free to contact me with questions that you may have pertaining to this or any other aspect of mortgage banking.
I also want to wish everyone a VERY HAPPY AND HEALTHY THANKSGIVING!!
Lee
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