Mortgage Rate Dips Again, Pointing to a Rise in Refinancing Risk
Applications to refinance home loans are close to their highest levels since November 2016.
Thirty-year mortgage rates have fallen this week to their lowest levels since late 2016, handing cheaper borrowing costs to homeowners and greater risks to the money managers that invest in home loans.
Freddie Mac’s 30-year mortgage rate fell 0.11 percentage point this week to 3.73%, extending a downward trend that started in November, the company said Thursday. With rates having fallen more than a percentage point over that period, applications to refinance home loans are close to their highest levels since November 2016, a separate report said this week.
As the mortgage rate has dropped, homeowners have responded by applying to refinance their loans into lower rates, sending the refinance index to trend near its highest level since November 2016.
Refinancings are of the utmost importance to the sector, as one of the main variables mortgage traders must accurately forecast to properly value their investment is the speed at which the underlying home loans will be paid off. For those who paid a premium for their bonds, this can hurt returns as they get their investment back more quickly than expected.
Falling rates mean MBS investors will need to add duration, referred to as “convexity hedging.” They can do so by purchasing Treasuries, receiving fixed rates in swaps or even buying more MBS, where the lower coupons usually offer higher duration.
There is a positive note amid this negative news for MBS investors, though. If the historic trend seen since 1999 is any guide, this drop in rates shouldn’t lead to a surge in mortgages to buy homes, as sales are lagging population growth with many Americans priced out of the housing market.
Since the start of 2000, home prices have risen 114%, helping send the U.S. homeownership rate to near its lowest level in nearly half a century. So while the population over that time has grown about 17%, new home sales have dropped 28% and existing home sales have risen just 5%. Both new and existing sales are the main drivers of net MBS supply.
Year-to-date net supply of agency MBS is about $51 billion, according to a recent report by Morgan Stanley. Their forecast for the year is about $210 billion in net supply, while 2018 saw $281 billion.
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