–Weaker Link Between MBS Yields,Prim Mtg Rate May Persist For Some Time
By Brai Odion-Esene
WASHINGTON (MNI) – Changes in the business of mortgage origination
have contributed to the limited impact of the Federal Reserve’s last two
rounds of large scale asset purchases on primary mortgage rates, the San
Francisco Federal Reserve Bank said Monday.
“Notably … the link between rates on mortgage-backed securities
and actual mortgage rates has weakened in the wake of the financial
crisis,” San Francisco Fed economist Michael Bauer wrote in a report,
warning that this weaker link “may persist for some time.”
The bank, whose President John Williams is a voter on the Federal
Open Market Committee this year, released the Economic Letter reviewing
the Fed’s balance sheet programs, providing evidence of their impact on
private borrowing rates, such as corporate bond yields and mortgage
rates.
“The Fed’s recent balance sheet programs, known as large-scale
asset purchases, have had widespread effects on private borrowing
rates,” the report said, noting that these effects have come through at
least three channels: portfolio balance, signaling and market
functioning.
However, “reductions in private borrowing rates may have been
larger for the first round of LSAPs because the signaling and market
functioning channels played a very important role,” the report said.
But in subsequent LSAP rounds — QE2 and ‘Operation Twist’ —
“potential signaling and market functioning effects have been more
limited.”
In particular, higher spreads now compared to before the crisis
indicate more limited pass-through from secondary to primary mortgage
rates, the report said.
“This limited pass-through probably reflects structural changes in
the mortgage origination business,” it said.
“Importantly, mortgage origination capacity has contracted in the
wake of the financial crisis because of failures, reallocation of
resources to other activities such as loss mitigation and foreclosures,
and longer origination timelines,” the San Francisco Fed report stated.
As a result, industry consolidation may have reduced competitive
pressures among mortgage originators, meaning margins and pricing power
have increased, it said.
It also noted that mortgage originators are not under “as great
pressure to pass on decreases in secondary rates to homeowners.”
“This suggests that the weaker link between MBS yields and primary
mortgages may persist for some time,” the report predicted.
** MNI Washington Bureau: 202-371-2121 **
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