Wholesale and Correspondent Products; Primer on the MBS Market; Steepening Yield Curve

“My housemates are convinced our house is haunted. I don’t get it. I’ve lived here for 273 years and haven’t noticed anything strange.” Many people would be just fine with a haunted house. There are many building-related developments that would help the nation’s housing shortage, if only the Agencies or investors or local areas were more open to them. Tiny (“micro”) homes and lower-priced, smaller homes. 3-D printing. Manufactured housing. Conversions from retail or office have also helped. Over the past decade, the number of malls has decreased sharply, from 1,318 malls in the United States in 2014 to just 1,141 malls in the country as of this year. The mall enjoyed its dominance for the decades following the 1970s, serving as a major incubator of brands and a crucial meeting spot for teens. Now, some “dead” malls are getting a new life as housing or community spaces. (The make-up of “live” malls has shifted: over the decades apparel square footage has dropped, entertainment has increased, and food & beverage is flat.) (Today’s podcast can be found here and is sponsored by Gallus Insights, the go-to reporting and analytics platform for mortgage lenders and servicers. Gallus makes it easy to access real-time data, create custom reports, and uncover actionable insights, all with a user-friendly design. Simplify your reporting, streamline your decisions, and drive profitability with Gallus Insights. Hear an interview with Realfinity’s Luca Dalhausen on the latest changes and happenings from the NAR settlement.)

Correspondent and Wholesale Products

“Happy Holidays from eRESI! As the year comes to a close, we want to express our gratitude for your continued partnership and extend warm wishes to you and your loved ones. We’re excited to kick off 2025 with fresh Non-QM opportunities and are hitting the ground running in January! eRESI’s Lisa Schreiber will join panelists at the IMN 2nd Annual Residential Lenders Forum on DSCR & RTL in Aventura, FL. Also, meet with Amer Ahmed, Kris Willoughby, and Lisa Schreiber at the IMB25 Conference in Austin, TX, to explore our latest Non-QM growth strategies. We’re excited to continue our journey together in 2025 and remain committed to delivering the exceptional service you have come to expect from us. For more information, please get in touch with your eRESI Representative or email sales@eresimortgage.com. Here’s to a joyful holiday season and a prosperous new year ahead.”

“As 2024 winds down and we take a moment to pause and reflect, Citi’s Correspondent Lending Team would like to express our heartfelt gratitude and appreciation to our Correspondents and partners for making this past year such a resounding success. The relationships we fostered in the midst of a challenging market will endure, and we are proud to be a trusted investor for so many within the mortgage industry. Looking ahead to the new year, we’re excited to continue on a path focused on sustainable growth, delivering opportunities to our clients and the communities we serve. Our warmest wishes to all for a holiday season filled with joy, laughter, and time with loved ones!”

“U.S. Bank is pleased to announce Connecticut Housing Finance Authority has selected U.S. Bank as a servicer for its “Time to Own” and “DAP” downpayment assistance programs, specifically designed to support first-time homebuyers. Connecticut Housing Finance Authority aimed to partner with qualified servicers capable of purchasing, securitizing, and servicing mortgage loans for its programs, and U.S. Bank is honored to be chosen as one of its trusted partners. Together, we will empower sustainable homeownership.”

The ABCs of Mortgage Securities

What’s the difference between government bonds and men? Bonds mature.

Don’t worry… I won’t make your eyes glaze over. The question always comes up, “Rob, when my capital markets staff says, ‘Bonds are going down’ do they mean in price or yield are going down?” Price is not the same thing as yield. But usually if someone in capital markets says that “The market is going down” that typically means that mortgage-backed security prices are going down, and rates are going up.

I’ll give you an example. Let’s say in 2020 MBS investors were buying 3 percent Freddie and Fannie securities at par, or 100, or dollar for dollar. Now, however, they can buy those same securities and earn 6.5 percent.

Why would anyone want to earn 3 percent when they can earn 6.5 percent on their money? No one would. But what if they could buy those 3 percent securities, not at a price of 100, but at a price of 85 or 90 cents on the dollar? And that discounted price gives an investor a yield of 6.5 percent?! At that point, an investor may be indifferent about buying a new bond yielding 6.5 percent at 100 or an older bond yielding 3 percent at 85.

But wait, there’s a little more! Which one is going to be on the books longer? Or has less credit risk if the economy moves into a recession? That is reflected in the value of the servicing, so even though the price of the bond can be calculated mathematically, the actual price of the MBS will be influenced, or muted, by other factors.

That’s the basic reasoning in the price/yield discussion. But moving on to some bond basics, mortgage-backed bonds consist of pooled mortgages on real estate, residential mortgages in our case. But investors in fixed-income securities have other options and may shift their purchases and holdings based on minute differences in the perceived value of various instruments. Short-term U.S. Treasury Bills, longer-term Treasury securities (notes and bonds), Treasury Inflation Protected Securities (TIPS), municipal bonds issued by cities and towns, Agency Bonds sold to fund federal agriculture, education, (and mortgage lending programs), corporate bonds issued by companies, junk bonds (typically corporate bonds), and convertible bonds (corporate bonds that can be converted into stock at certain times throughout the term of the bond), are all out there in various ways.

Many bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds. But MBS are different: borrowers may refinance or sell their home and pay off their portion of the MBS.

In general, bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating. Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity. But as noted a few times above, MBS have the added complexity of prepayment risk influencing the prices that investors will pay. And investors often demand a higher yield to compensate for the possibility of prepayment.

As noted above, a Mortgage-backed Security (MBS) is a debt security that is collateralized by a mortgage or a collection of mortgages. An MBS is an asset-backed security that enables investors to profit from the mortgage business without the need to directly buy or sell home loans. Lenders may issue their own MBS, or sell the loans to aggregators who do that, or sell loans to Freddie Mac or Fannie Mae, or securitize FHA & VA loans through the Ginnie Mae program.

MBS often end up with insurance companies or pension funds. When an investor buys a mortgage-backed security, it is essentially lending money to home buyers. In return, the investor gets the rights to the value of the mortgage, including interest and principal payments made by the borrower. Lenders selling the mortgages they hold enable banks to lend mortgages to their customers with less concern over whether the borrower will be able to repay the loan. The bank acts as the middleman between MBS investors and home buyers. The servicer of the loan matters, especially during times of refinancing.

Ginnie, Fannie, and Freddie? As a response to the Great Depression of the 1930s, the government established the Federal Housing Administration (FHA) to help in the rehabilitation and construction of residential houses. The agency assisted in developing and standardizing the fixed-rate mortgage and popularizing its usage. In 1938, the government created Fannie Mae, a government-sponsored agency, to buy the FHA-insured mortgages. Fannie Mae was later split into Fannie Mae and Ginnie Mae to support the FHA-insured mortgages, Veterans Administration, and Farmers Home Administration-insured mortgages. In 1970, the government created another agency, Freddie Mac, to perform similar functions to those performed by Fannie Mae.

Freddie and Fannie charge gfees. Why? They guarantee timely payments of principal and interest on these mortgage-backed securities. Even if the original borrowers fail to make timely payments, both institutions still make payments to their investors. Know that the government does not guarantee Freddie Mac and Fannie Mae. If they default, the government is not obligated to come to their rescue. However, the federal government does provide a guarantee to Ginnie Mae. Unlike the other two agencies, Ginnie Mae does not purchase MBS. Thus, it comes with the lowest risk among the three agencies.

Capital Markets

Tuesday was never likely to be an eventful day in the capital markets between an early close before the Christmas holiday and no economic releases of note on the economic calendar (this entire week is light on economic data and bereft of Fed speakers). However, the U.S. Treasury is conducting $211 billion in federal note auctions over the course of the week. Monday contained a well-received auction of 2-year notes ($69 billion), Tuesday brought solid demand for 5-year coupons ($70 billion), and today markets will receive 7-years ($44 billion).

Demand for Treasuries this week has been solid because of the recent rise in yields, though Treasuries have been under pressure as investors remain wary of parking cash in U.S. government debt that matures in a decade or more. This is primarily due to concerns about what the next administration will be doing and how it impacts where rates go. Short term Treasury yields are expected to fall in 2025, but that is on the opposite end of the yield curve from mortgage rates. Yields become less sensitive to the Fed’s policy the further out in duration you go along the curve.

Yields on long-term debt have led moves higher, adding to a steepening trend in the curve that’s dominated trading in the market (we are currently at the steepest point in 30 months). Case in point, average 30-year mortgage rates are ending the year roughly 20-basis points higher (6.83 percent) than where they started out in early January (6.65 percent), despite 100-basis points of fed funds easing in 2024. This will certainly be something to watch in 2025 as the Fed weighs how much more to cut rates given sticky inflation and a resilient economy. The most recent estimates are for 50-basis points of Fed easing in 2025.

Today’s economic calendar is under way with initial (219k, as expected) and continuing (1.91 million) jobless claims. Later today brings several Treasury auctions that will be headlined by $44 billion 7-year notes and Freddie Mac’s Primary Mortgage Market Survey for the week ending December 26. Last week, the 30-year mortgage rate jumped 12-basis points to 6.72 percent. (More current and accurate rates available here: https://www.mortgagenewsdaily.com/mortgage-rates) We begin Boxing Day with Agency MBS prices worse than Tuesday’s close by about .125, the 2-year is up to 4.35, and the 10-year yielding 4.62 after closing Tuesday at 4.59 percent.