Mortgage rates are likely to remain relatively stable for now, despite the growing buzz about interest rates and home prices.
At least for some time, those two forces can be made to pull in some opposite directions. This may help keep mortgage rates relatively stable: According to Freddie Mac’s weekly survey, the average 30-year term mortgage rates changed slightly from the beginning to the end of the third quarter, at about 3%. Fannie Mae economists currently predict rates to be around the same level by the end of the year, and to reach more than 3% next year.
One factor threatening to raise mortgage rates further is that yields on mortgage-backed bonds issued by government-sponsored enterprises such as Fannies and Freddy’s have been unusually close to Treasury yields. Many analysts attribute this in large part to the Fed’s purchase of mortgage bonds, which the central bank bulked up last year as part of a series of measures to help backstop anxious markets in the depths of the pandemic. had started. This means that the spread is likely to normalize, with mortgage bond yields rising even faster than Treasury yields. This in turn will put upward pressure on mortgage rates as mortgages are sold in those vehicles.
But there is a counter-balance. Mortgage lenders could absorb some of that pressure without passing it along to borrowers in the form of higher rates. During most of the pandemic, mortgage originators have been highly profitable, earning unusually large margins when selling fanny- or Freddie-qualified mortgages in the bond market. A proxy for this is the spread between 30-year term mortgage rates and the return on mortgage-backed securities.
The spread became huge in 2020 as homeowners scramble to take advantage of lower rates to refinance. The rush of demand meant that lenders had a pricing advantage. It takes time for promoters to hire enough people to meet demand, which constrains the supply of mortgage loans.
As rates rise and the pool of people qualified to refinance their mortgage shrinks, that capacity becomes oversupplied — a shake-out process that takes time. The spread has decreased during this year, but it is still higher than in the few years before the pandemic.
“The impact is likely to be felt more by lenders than by borrowers for at least the next few quarters,” says KBW analyst Bose George.
Not only that, but the recent emergence of large, publicly traded promoters such as Rocket Cos, UWM Holdings and Lone Depot has provided the diversification and scale to reduce marketing, technology and other borrowing costs. Even in the face of tight spreads, companies may be able to battle for volume and market share. Mr. George says that, in times of intense competition, spreads can fall far below the average, which is expected to be KBW in 2022.
There is also reason to think that mortgage bond yields may continue to trade relatively close to Treasury yields after the recent widening slightly. In addition to the Fed, banks engulfed in deposits have been major buyers of mortgage bonds. As mortgage-backed securities strategist at Bank of America, Satish Mansukhani notes, out of more than $8 trillion in outstanding agency mortgage bonds, about $6 trillion is “closed” with the Fed and banks.
“The outlook is relatively stable,” he says. “Even with the Fed backing out, it will take time for the market to price it.”
Even if mortgage rates rise, there are other ways to buy and refinance a home that are relatively inexpensive and in constant amounts for originators. Government-sponsored enterprises such as Fannie’s or Freddy’s can help. It determines how much an originator can sell a mortgage for, and the respective rate to charge, how much it costs to guarantee the loan with the GSE. GSEs are already abolishing a pandemic fee to offset the higher risk. The Biden administration may be looking at other ways to reduce fees or other barriers for some borrowers as a way to boost housing affordability.
One wild card: If home prices keep skyrocketing, somewhat lower rates fuel that. This could be a factor that influences the Fed’s thinking about how aggressively it needs to respond to rising asset prices. Higher prices may induce a greater supply of homes, but if it doesn’t, and if the Fed’s tapering turns into bond sales, or interest rates start rising too rapidly, mortgage rates are likely to ease into some. Mune: They’ll go up.
Telis Demos at [email protected]
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Bose George is an analyst at KBW. He was incorrectly referred to as Mr. Bose in another context in an earlier version of this article. (corrected October 8)