February was a significant month for the mortgage and real estate markets, as a massive bailout package was signed into law, and further talk of foreclosure prevention efforts at the federal level reassured mortgage investors of the safety of their investments. An $8000 tax credit for first-time homebuyers sparked hope for increased home sales in 2009, both for starter homes and condominiums, as well as for so called "move-up" homes needed by those current homeowners able to sell into the current market and purchase significantly discounted replacement homes.
Entering March, the Mortgage - Treasury spread reached its lowest point since June, 2008, closing at 2.09%. The spread was last at that level June 5th, 2008 when it closed at 2.06%. The 10-week moving average spread closed February at 2.50%, reflecting the significantly higher spread in effect throughout December and January. The Mortgage-Treasury spread is a measure of the relative risk of investment in mortgage securities compared with investment
March will likely be dominated by further market absorbtion of recent events, especially the new Making Home Affordable plan recently introduced by the White House and several major mortgage agencies. This program should provide further support to the housing market and to the value of existing mortgage securities. As the rate of foreclosures is reduced, housing inventory should gradually decline, providing some stability to home prices. Should this trend continue, it is possible the mortgage - treasury spread could stabilize near current levels.
Other factors that will be of impact in March include the potential for further fed intervention in mortgage and treasury markets. The Fed's $500 billion program to stabilize the mortgage secondary market, announced in December, is intended to boost confidence in the mortgage backed security market that is at the core of current economic challenges. This investment has been successful, as the Mortgage - Treasury spread has declined by a full percentage point since that program's announcement in December. In January, the Fed announced it would be closely monitoring treasury rates and might intervene if conditions required. Thus far, they haven't.
Also, it is anticipated that home purchases spurred by the aforementioned first time homebuyer credit will begin to have an affect on the market, providing some degree of stability to real estate prices. Remember that a significant degree of mortgage risk comes from concern that homeowners might be unable to sell their homes if circumstances demanded. As the purchase market picks up in the spring, expect to see further support for the current reduced Mortgage-Treasury spread. Rhode Island and Massachusetts have recently seen a decrease in foreclosures; it is possible this may spread.
Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University. He can be reached at (401) 263-8655 or by leaving a comment on this article.
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