To further foster economic growth by the Federal Open Market Committee, the Federal Reserve Bank of Boston and the Federal Reserve Bank of New York hosted a workshop to discuss incongruities between performance in the primary and secondary mortgage markets.
The widening between the yields of mortgage-backed securities in the secondary market as it relates to primary mortgage rates is a particular concern, according to speaker William Dudley, president and CEO of the Federal Reserve Bank of New York.
The FOMC MBS purchase program operates principally on the secondary rate and for these actions to achieve full impact, reductions in the secondary rate needs to go through the primary rate.
“An important objective of this workshop is to gain a deeper and clearer understanding of the determinants of the primary-secondary spread and its dynamics over time,” Dudley said.
He added, “This spread is influenced by a number of elements, such as the valuation attached to the right to service the mortgages underlying the security, and the annual guarantee fee that is paid to cover the credit guarantee provided by the government-sponsored enterprises.”
The widening of the primary to secondary spread is mainly due to higher annual agency guarantee fees. The average guarantee fee increased from 20 to 25 basis points to about 50 basis points, currently.
The monetary policy in place effects the financial markets and financial conditions, which depends on how the policy is effective in key areas of the economy, specifically the housing and mortgage market.
With yields on newly issued agency MBS declining about 45 basis points and the Freddie Mac survey 30-year primate rate declining 23 points to 3.32%, this indicates the monetary policy continues to be effective.
“An easing of policy lowers the secondary market rate at which mortgage-backed securities trade, which puts downward pressure on the primary mortgage interest rate,” Dudley said.
He added, “A lower primary mortgage rate enables borrowers to refinance their existing loans at lower rates, and increases demand for home purchases, supporting house prices and household wealth, which in turn may increase household access to credit.”
