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Yields on bond spreeds are an important factor to home loan interest rates. Most people believe the Federal Reserve is in control when it comes to mortgage rates however that is not the case. Home loan inerest rates are determined by the Mortgage Backed Securities market and rates go up/down depending on demand for Mortgage Backed Securities.
To obtain a better understanding on current rates and the direction they are in, be sure to ask your loan officer.
Agency Mortgage-Bond Yield Spreads Rise on Potential Bank Sales
By Jody Shenn
July 7 -- Yields on agency mortgage securities rose to the highest since March 11 relative to U.S. Treasuries amid concern that financial companies may need to sell the debt.
The difference between yields on Fannie Mae's current- coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 9 basis points to 206 basis points, according to data compiled by Bloomberg. The spread has expanded 32 basis points since June 18.
Investors are speculating that Bank of America Corp., the second-largest U.S. bank, may need to sell assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets, said in a note to clients. An accounting change may leave the two largest holders of the debt undercapitalized, Lehman Brothers Holdings Inc. said today.
``Balance sheets are constrained,'' Hackel said in a telephone interview from Greenwich, Connecticut.
Agency mortgage bonds, among the most liquid fixed-income securities, are guaranteed by government-chartered Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae. Congress created Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, to expand homeownership by increasing mortgage financing and provide market stability. Ginnie Mae guarantees securities backed by government-backed loans.
Adding Capital
Fannie Mae may need to add $46 billion of capital and Freddie Mac may need $29 billion because of the possible accounting change, Lehman analysts led by Bruce Harting wrote. The companies will probably get an exemption from the new rule, which may otherwise force them to bring their off-balance sheet assets back onto their balance sheet, they wrote.
Fannie Mae fell $3.19, or 17 percent, to $15.59 as of 2:12 p.m. in composite trading on the New York Stock Exchange, after earlier dropping as much as 22 percent. Freddie Mac declined $2.58, or 18 percent, to $11.92, after falling as much as 29 percent.
Spreads between 10-year Treasuries and bonds backed by Fannie Mae reached a 22-year high of 238 basis points on March 6. An increase boosts the cost of new mortgages for the most creditworthy consumers. A basis point is 0.01 percentage point.
Fixed-rated agency mortgage bonds returned 73 basis points less than Treasuries with maturities similar to their expected lives in the first three days of this month, according to Lehman index data.
Charlotte, North Carolina-based Bank of America on July 1 completed its purchase of Countrywide, the largest U.S. mortgage lender, for about $2.5 billion in stock. Bank of America spokesman Scott Silvestri declined to comment.
Option-Adjusted Spread
The so-called option-adjusted spread of fixed-rate agency mortgage securities has risen 26 basis points since June 18, to 143 basis points on July 3, according to Lehman data. An option- adjusted spread takes into account the impossibility of knowing when the underlying mortgages will be paid off. Yield spreads also don't reflect that borrowers pay down principal both sooner and later than the bonds' average lives.
Bloomberg current-coupon indexes represent the average of yields for the two groups of mortgage bonds with prices just above and below face value, the ones lenders typically package new loans into. The spread helps determine the rates offered to homeowners on new prime mortgages of $417,000 or less in most areas, and up to $729,500 in other high-cost counties.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: July 7, 2008 14:19 EDT
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