WEEKLY BRIEFINGHOUSING: POLICY & FINANCE12/10/2012
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FED MBS HOLDINGS ARE REDUCING RATES BUT TRANSMISSION EFFECT VERY REAL
The biggest housing-related news came early this week when William Dudley, President of the Federal Reserve of New York, gave aspeech summarizing a paper by
New York Fed sta
in September to purchase an additional$40 billion a month of agency mortgage-
is working; current MBS yields declined roughly 45 basis points while the Freddie Mac 30-year rate declined 23 basis points. However, there are impediments to current policy: the yield that the Fed is receiving in the primary marketis significantly lower than actual mortgage rates available to the consumer (Exhibit 1).Historically, the spread hovered between 30 and 50 basis points. In September, it rose above 150 basis points. There are several reasons cited for this anomaly. Outsideof the actual paper, Nick Timiraos of the
Wall Street Journal
provides what we found to be the most concise news
ability and higher costs associated with increased regulation of the mortgage market. Other areas of concern are market concentration, capacity constraints, higher barriers to entry and pricing power oncertain borrowers.
SUPPLY OF MORTGAGE CREDIT IS NOT WHAT IT USED TO BE
Although there are several reasons for the transmission effect, the most logical reason behind it is the current level of mortgage origination compared with prior to thecrisis. For example, according to a report titled
Future of the Housing & Mortgage Markets: Winners & Losers
FBR Capital Markets & Co.,using data fromInside Mortgage Finance,the largest mortgage originators in 2005 were Bank of America (including Countrywide), Wells Fargo (including Wachovia and Golden West), JPMorgan (including Washington Mutual), Citi (including ABN Amro) and GMAC. They estimate that roughly $1 trillion of capacity has left the market since 2005.Bank of America exited the market and closed down Countrywide, JPMorgan closed
and Citi and GMAC now havesubstantially smaller roles in the market. Of the top 20 mortgage originators of 2006 based on Home Mortgage Disclosure Act data
only five of the 20 remain(Exhibit 2).
GIVEN MARKET CONDITIONS, EXPECTATIONS ARE FOR A PROLONGED PERIOD OF LOW INTEREST RATES
The market forecast is for continued sub-par economic growth. The current unemployment rate sat around 7.7 percent with the economy adding 146,000 jobs in
November. While not significant enough to alter sentiment, Hurricane Sandy may have played a role in the numbers. These diminished expectations, combined withthe end of Operation Twist and the expectation of tighter fiscal policy in the new year, will most likely lead the Fed to take further action. Fed action over the past yearhas caused the yield curve to flatten. One year ago, the 30-year rate was at 3.04 percent; it is now at 2.81 percent (Exhibit 7).
and with potentially more accommodative policy, these holdings could rise. These purchases should drivedown the yield on MBS, which should result in lower mortgage rates for the consumer. While the transmission effects are somewhat muted, evidenced by the spreadbetween primary and secondary MBS (discussed above), expectations are for a prolonged low interest rate environment to support continued refinancings andoriginations.