Economist's Commentary: February 29, 2008
A Short-Term Pinch for Long-Term Gain
By Ken Fears, Manager, Regional Economics
The average rate for a 30-year fixed rate mortgage rose 52 basis points over the last two weeks to reach 6.24% in Freddie Mac's Primary Mortgage Market Survey for February 28th. This increase eliminates much of the previous month's improvement. Market watchers have suggested that the increase in core CPI or a more pessimistic view on the U.S. economy or even the weak dollar could account for this rate surge. However, the increase of roughly 50 basis points in the spread between the 10-year Treasury and the 30-year FRM suggests that the economy is not the answer.
Research by Barclays Capital pointed out that investors in the mortgage backed securities (MBS) market are nervous about new loan limits for the GSEs. Higher loan limits will likely spur many jumbo owners to refinance into more affordable loans. This trend would create a problem for MBS investors holding those mortgages, because they could lose money or face disrupted cash flow from their portfolios. This report suggested that the MBS market should expect higher mortgage rates and wider spreads as MBS investors demand to pay less for agency mortgages.
This explanation may hold water, but the consternation by MBS investors will dissipate as the level of refinancing, the factor that is disrupting the portfolios of MBS investors, declines. Furthermore, many jumbo borrowers are of the most prime rating. So, the pool of borrowers that will be granted access to conforming loans by the new GSE limits posses roughly the same risk to the MBS market as the current conforming pool and should receive the same rates. The risk that Barclay Capital points to is strictly based on mortgages in the current portfolios of MBS investors that might be refinanced and not the future mortgages to be sold into the MBS market.
It is difficult to tell how long this boost of refinancing will last, but this refinancing will help put many home owners into more affordable situations. Stabilizing the housing market will help to prevent many owners from going into foreclosure and to keep housing inventories down. In addition, the average 30-FRM remains nearly 50 basis points below its July level. Combined with lower home prices, affordability and monthly payments are lower today than they were last summer.
As the uncertainty in the MBS market over jumbo refinancing dissipates, the short term increase in conforming rates will moderate back to lower rates allowing the higher GSE loan limits to spread more stable conditions to the rest of the housing market. In short, this bout of short-term uncertainty will give way to long-run stability in the housing markets and the greater economy as a result of the higher GSE loan limits.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.
