Fiscal cliff fix good news for MBS investors
Investors are holding their heads high Wednesday as Congress came to an agreement on finding a fix to avoid going over the ‘fiscal cliff.’
The housing market survived two tax provisions during the Congress decision to extend tax relief on mortgage debt forgiveness for another year and did not touch the mortgage interest deduction.
While investors — along with the housing market — are likely to benefit from a few key areas of concern being swept away with the deal, risks for investors still remain.
Mortgage Bankers Association CEO David Stevens noted the "greatest risk we have is that 2013 is the year of regulatory implementation."
Over the short term, ending uncertainty from the 'fiscal cliff' resolution has sent rates higher and curve steeper in the market, according to analyst Sarah Hu of Royal Bank of Scotland Banking & Markets (RBS).
"[This] is likely to slow down the refianceability of the agency mortgage-backed securitization market and provide good news for MBS investors," she said.
Although the potential ‘fiscal cliff’ pushed mortgage rates up, Paul Miller of FBR Capital said rates will remain generally unchanged because the spread between the primary market and secondary market is very wide.
"The refi boom will last a very long time, HARP is huge," Miller said.
The move to saver certain tax deductions that protect players in the housing market mirrors Federal Reserve efforts to continue to stimulate the housing side of the economy.
The Fed continues their effort to push mortgage rates to record lows, which kick-started the non-agency market in 2012.
The Federal Open Market Committee announced Dec. 12 it would continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.
Fed chairman Ben Bernanke stated the decline in mortgage-back securitization yield will not stop investors from returning to the markets when the Fed agrees to sell its holding.
As rates remained compressed, so do yields. Eventually, the Fed would hope to sell its holdings in this low-yield paper and Bernanke believes buyers will be waiting when that happens.
In regards to short term non-agency MBS, the market is expected to show some outperformance along with other risk assets, said analyst Jeana Curro of RBS Banking & Markets.
"We expect longer-term performance however to be affected by other factors, such as economic growth and resolution of the debt ceiling," she added.