FRM Update

May 15, 2017



Small price declines and slightly wider spreads between MBS and their Treasury or Agency benchmarks seemed to have created just enough of a value shift to inspire many portfolio managers to act last week. As the week wound down, activity slowed back down. Small yield spread increases occurred consistently across the spectrum of mortgage related products. Small increases in mortgage applications for both refinancing and purchases slightly outpaced impacts of seasonality alone, while conventional mortgage rates increased 1bp and FHA mortgage rates declined 2bp.

MBS


 

 

 

CMOs

 

Rates and Refis

 

 

 

Housing

The fates and futures of the GSEs returned to the financial headlines last week. FHFA Director Mel Watt sounded off a bit to the Senate Housing Committee, saying “I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform” and that “Congress urgently needs to act on housing finance reform.” Based on the terms of the 2008 conservatorship and in keeping with the 2012 amendment to this agreement, FNMA and FHLMC must send their quarterly profits to the U.S. Treasury. This means that next year there will be no capital buffers in place, an outcome that Mr. Watt finds unacceptable. Of this potentiality, he said he may be forced to “unilaterally deal with it, which is something I’d prefer not to do….If the two parties can’t dance, then I may have to dance by myself.” The compromise he seeks with U.S. Treasury Secretary Steven Mnuchin could result in a compromise in the form of curtailment of some of the dividends, retaining them to buffer the capital positions against potential future losses.

At the minimum, this rhetoric should serve to revitalize efforts of overall reform of the GSEs.

 


James Plunkett

Director of Investment Product Strategies

Vining Sparks

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