During a question-and-answer session, Federal Reserve chairman Ben Bernanke stated the decline in mortgage-back securization yield will not stop investors from returning to the markets when the Fed agrees to sell its holdings.

The announcement came alongside the Federal Reserve reporting that interest rates will remain unchanged during the close of the Federal Open Market Committee meeting Wednesday — and that there would be no immediately change to the Fed buying and owning large portions of the aforementioned MBS.

Specifically, the Committee decided to continue to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase long-term Treasury securities after the maturity extension program is completed at the end of the month at a pace of $45 billion per month. 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.

“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the report said.

Mortgage rates and MBS yield spread is widening. Bernanke pointed out that while he doesn’t expect 100% pass through of MBS, over time a great majority of MBS yields will get passed through with the benefit seen by retail customers and mortgage rates. 

However, various factors in place are affecting those spreads including capacity limitations as well as the g-fee hike. 

The Federal Housing Finance Agency targeted five states in its plan to adjust the guarantee fees Fannie Mae and Freddie Mac charge for single-family mortgages. It hopes to recover a portion of the “exceptionally high costs” the GSEs incur in cases of mortgage default in those states.

The five states were Connecticut, Florida, Illinois, New Jersey and New York.

The FHFA said these states hold average total carrying costs that “significantly exceed” the national average and, therefore, impose the greatest costs on the GSEs and taxpayers.

Mortgage-backed securities investors have been driven to the sidelines by prepayment risks associated with unknown future federal policies and the pending fiscal cliff, according to analyst Nanlan Ye with investment manager TCW Group.

“Long-term supply and demand technicals remain highly positive for the agency MBS basis, but short-term volatility in MBS performance is likely to remain high as we approach the year end,” he wrote.


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