As part of their current rate stimulus program, the Fed continues to buy roughly $1 billion a day of mortgage bonds (aka MBS) with proceeds from existing MBS holdings. For the four-day week ending November 16, Reuters reported the Fed bought $5.55 billion in agency MBS, or $1.4 billion per day on average, compared to $5.4 billion in mortgage banker supply over this period.
And speaking of MBS markets, do originators really think that the HARP 2 loans will carry the same rates as a brand-new, 80% purchase loan? Or, asked another way, where will the new securities trade since they could be filled with loans having greater than a 125% LTV?
Jungle drums say +/- 3 points worse than current MBS’s, based on risk and illiquidity. As one astute reader wrote, “If you convert three points to yield and bump a borrower’s refi rate by 75 basis points (meaning .75% higher in rate), that definitely cuts into the refinance potential for the outstanding loans.”
But investors may want the new pools, given that the prepayment expectations should be very slow. Stay tuned.