So the government says that they are going to stop buying mortgage-backed securities sometime inthe first quarter of 2010. 

Then what?

Let’s consider what the Fed’s influence has been – are rates artificially low currently?

The historic rule-of-thumb has been that you could count on conforming mortgage rates to be approximately 1.75% above the 10-year treasury yield.  The chart below shows that in recent months we’re about back to the norm:


Friday 10-year yield was 3.356% + 1.75% = 5.106%, which is about where conforming mortgage rates are too, or slightly lower, so the Fed’s help is keeping rates in line with historic spreads. 

Jumbo rates were usually about a half-point above conforming rates.  On Bank of America’s website today, their 30-year fixed jumbo rate is 5.50% with 0.75% points.

When it comes to the mortgage industry, you can predict the future with great certainty.  Once we get into 2010 and the Fed’s MBS pullback is all over the news, lenders will seize the opportunity to bump mortgage rates at least a half-point, if not more, regardless of the ten-year yield.  Look at the history – it’s just like gasoline prices, they prey on the fear created in the headlines.

If conforming rates end up in the 5.5% to 6.5% range, the homebuyers will likely tolerate it, especially if prices ease up a bit.  Throw in the housing tax-credit and buyers will forge ahead during the first four months of 2010.

But who is going to fund these loans without a guaranteed secondary market?

Apparently our usual suspects; B of A, WFB, JPMChase, etc., are willing to fund jumbo loans and keep them in their portfolio today at 5.50% with 20% to 30% down payments.  Wouldn’t they be willing to fund conforming loan amounts with those terms too?  Probably, especially if they could get rates into the mid-6’s without the ten-year yield going up much.

The conspiracists will figure that the Fed will be back-door funding a portion of the business anyway, backstopping the whole business all along.

Would there be a market for MBS yields around 6%?  

I’m not sure, but I wouldn’t be surprised if Angelo’s private-label MBS machine gets cranked up again.   But this time they should do it right.

Sell private mortgage-backed securities on Wall Street or elsewhere with full transparency.  Pool the loans with identical terms, and rank/rate accordingly.  

Would there be investors interested in buying a  batch of mortgages that had 20% down payments, full-doc qualifying and FICOs over 720 if they could get a yield in the high-5-percent range?  Let’s break them up into safer 30% and 40% down payments, for a slightly lower yield.

What do you think mortgage rates would need to be to attract an ample pool of investors?

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Jim the Realtor
Jim is a long-time local realtor who comments daily here on his blog, which began in September, 2005. Stick around!

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