When will they learn – Fed mortgage assistance leads to higher rates

Any homeowner is familiar with a rate lock – in which the interest rate on their mortgage is locked in for some weeks before the loan is finalized. In order not to get burned should rates rise during that period, mortgage originators routinely hedge by shorting mortgage-related securities.

Enter the Fed, which stepped into panicky markets in mid-March with a number of operations, included among them plans to buy massive amounts of MBS. Problem solved? Not so much.

The Fed’s actions sent MBS prices shooting higher, sending mortgage originator hedges deep into the red. Phil Rasori, whose company handles about 20% of hedging for the mortgage market, estimates originators faced margin calls of as much as $5B – an “existential threat” for some nonbank players.

The Fed’s backed off a bit, but the mortgage market hasn’t yet recovered, with the gap between the 10-year Treasury yield and the 30-year mortgage rate up to 2008/09 financial crisis levels of nearly 300 basis points. The five-year average is about 175 bps. Some operators aren’t figuring on a narrowing of spreads until at least June.

The Fed’s aim is to support the smooth functioning of mortgage-securities markets, says the FRBNY’s Lorie Logan, who heads the central bank’s open-market operations.

https://seekingalpha.com/news/3568573-when-will-learn-fed-mortgage-assistance-leads-to-higher-rates