Mortgage Market Appears Stable
Tougher guidelines and the Federal Reserve buying mortgage backed securities appear to have stabilized mortgage prices. Historical modeling supports a strong correspondence between the 10 Year Treasury yield and mortgage rates. Investors pick between the two and so yields on both must compete. A year ago, mortgage rates and yields were several percent higher then Treasury bonds which indicated an overall lack of faith and risk associated with mortgages and mortgage backed securities.
The Federal Reserve’s contribution was to stabilize plummeting mortgage backed securities markets by stepping in as a buyer. Details of this program were released on December 30, 2008.
Lenders, FHA, Fannie Mae, Freddie Mac, and Ginnie Mae have also contributed by tightening underwriting guidelines and implementing much higher risk-based loan fees and credit score requirements. While I won’t go into detail on those tightened guidelines and increased fees in this article, it does appear that the effects did indeed stabilize mortgage rates and tie them much closer to safe investments such as Treasury Bonds.
To see this effect I am overlaying the 10 Year Treasury yield and the Fannie Mae Required Net Yield 30 Year / 30 day Delivery. We see the yields shrink to a standardized gap as the mortgage market stabilizes.
So what does this mean to you? Well, it looks like mortgages have stabilized to the point where they are again tied closely to safer money markets. This is good news as it signals that guidelines will stop tightening. The bad news in that mortgage rates now appear to be subject much more directly to any effect acting on money markets.
