While 2015 is still in its early stages, it doesn’t look too good for David Worley Fannie Mae Mortgagegovernment-backed US mortgage bonds so far, which are off to their worst start relative to Treasuries since at least 1997.  In the meanwhile, investors in the $5.5 trillion market are bracing for a surge in homeowner refinancing.  According to Bank of America Merrill Lynch index data, returns on mortgage securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae were .6 percentage point less than those on similar-duration government debt this month through yesterday.  Ginnie Mae securities, which package Federal Housing Administration loands, have underperformed Treasuries by .9 percentage points.

This relative slump, which has continued today, is being fueled by concern that refinancing is accelerating after home-loan rates fell to the lowest since May 2013.  Investors in mortgage-backed securities are betting that the trend will be further stoked by changes to government programs,  including a lowering of insurance premiums on new FHA loans announced earlier this month.  After a year of low prepayment volatility, 2015 is bringing new risks to the MBS market.  This underperformance continued today, as 30-year Treasury yields fell to a record low.  Gains in prices of Fannie Mae’s 4.5 percent 30-year securities, for example, lagged behind those on a basket of similar Treasuries by .2 cent on the dollar at 12:15 pm in New York.  Government-backed mortgage bonds have returned .45 percent this year, after gaining 6.1 percent in 2014, after outperforming Treasuries by .74 percentage points.

Earlier today, the Mortgage Bankers Association reported that applications for home-loan refinancings jumped 66 percent last week, the most since 2008, to the highest since July 2013.  Refinancing damages investors in mortgage bonds that trade for more than face value by returning their principal faster at par and curbing interest.  The price of government-backed mortgage securities average at 106.5 cents on the dollar, meaning that holders would lose 6.5 percent if they were immediately repaid.  The annual fees the FHA charges to guarantee mortgages will be cut by .5 percentage point, to .85 percent of the loan balance.  This move also puts pressure on both Fannie Mae and Freddie Mac to lower the fees that they charge to guarantee mortgages with high loan-to-value ratios.

Even though WJ Bradley Mortgage Capital hasn’t yet seen the FHA change creating a large amount of business, the firm has already started getting busier.  While some are skeptical that this adjustment will do much to boost FHA loans for home purchases, chances are that there’s still going to be a lot of refinance activity, with a lot of people ramping up marketing.

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