US Treasury securities don't pay off

One of the big differences in bonds backed by the U.S. Government and those backed by first liens is that when rates decline, US Treasury securities don't pay off. Borrowers historically do refinance, and many a loan agent has a book of business based on refinancing. This time around, however, things may be different. Although mortgage rates are approaching the levels in 2002/03, unfortunately refinancings should be significantly lower. First, jumbo loan (and alternative documentation) availability is very limited due to underwriting guidelines, securitization economics, and bank balance sheet constraints. Second, even with FNMA & FHLMC, the soft housing market and increasing guarantee fees should keep refinancings slower than in previous years. The good news is that investors are more interested in owning securities backed by mortgages than they were in the past due to a lower fear of refinancing! Once again, let's hope for an increase in loan limits, and finding borrowers with equity and that can qualify is job #1.