Tainted TBAs: Conforming Limit Increase May Increase Mortgage Rates

Via Rueters’ Al Yoon comes a perfect look at why the proposed hike to the conforming mortgage loan limit runs the risk of actually raising mortgage rates for everyone:

Potential damage to the “to-be-delivered” (TBA) market — the most actively traded agency mortgage market where investors can buy bonds before they are actually created — prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.

“The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen,” said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.

Mortgage rates would rise for the “vast majority” of agency-eligible borrowers, he said …

“When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral,” said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. “That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates.”

Trading activity in TBA securities — particularly so-called “TBA dollar rolls” — is a big deal, and something HW recently highlighted, thanks to the above-mentioned Linda Lowell; readers unfamiliar with the concept would do well to study this summary, courtesy of Vanderbilt Capital Advisors.

I’d noted in recent commentary that “fair access to housing capital,” a term being bandied about by those who want access to the lower rates now afforded to GSE-eligible mortgages, isn’t likely to be free.

The situation brewing in TBA trades is exactly what I was getting at.

(H/T: Calculated Risk)