Housing MarketMortgage

Housing industry pleads with Biden administration to narrow the mortgage spread

Treasury should buy MBS, amend the GSE PSPAs, coalition of trade groups says

A coalition of trade associations — including the Community Home Lenders of America (CHLA), National Association of Realtors (NAR), and Independent Community Bankers of America (ICBA) — on Thursday called on the Biden administration to reduce the historically large spread between the 30-year mortgage rates and 10-year Treasuries.

The trade groups noted that the spread sits at over 300 basis points (bps) compared to the historic norm of about 150 bps.

“Action is critical to address homeownership affordability and lending challenges and reduce impediments for servicers to loss mitigation efforts to keep defaulted borrowers in their home,” CHLA, NAR and ICBA wrote in a letter to Lael Brainard, director of the National Economic Council, and Janet Yellen, secretary of the Department of Treasury.

To that end, the CHLA, NAR and ICBA urged that the Federal Reserve shift its policy to maintain its stock of mortgage-backed securities (MBS) and suspend runoff until liquidity and the spread between the 30-year fixed rate mortgages and 10-year Treasury stabilizes.

Since the central bank’s campaign to tame inflation began in March 2022, the Fed has allowed up to $60 billion a month in Treasury securities and $35 billion in MBSs to mature and roll off from its holdings to reduce its balance sheet. 

Because the Fed’s holdings are constantly reduced by runoff from loans paying off and paying down, the Fed should at a minimum, be buying MBS to offset the runoff, the trade associations urged. 

“Renewing activities to support demand for 30-year MBS – and reducing the current artificially inflated 30-year MBS yields – will not undermine the overall impact of the Fed’s actions to increase short-term rates and combat inflation. Likewise, MBS bought at current 6% coupons would be much easier to liquidate than 1% to 3% coupons purchased two years ago,” the trade groups wrote.

The administration should also amend the preferred stock purchase agreements (PSPAs) to enable Fannie Mae and Freddie Mac, on a temporary basis, to purchase their own MBS and/or Ginnie Mae MBS for a defined period of time, they said in the letter.

“Our groups simply urge action to address the strain on liquidity in the market for MBS through the purchase and holding of 30-year fixed rate mortgages.”

These actions to reduce the spread would cut down mortgage rates by 100 to 150 bps, the letter added. 

Amid soaring mortgage rates, housing trade groups — including the Mortgage Bankers Association (MBA), NAR and National Association of Home Builders (NAHB) – have asked the central bank to provide market certainty regarding its rate path.

In a letter to the Board of Governors of the Federal Reserve System earlier this month, housing trade groups urged Fed Chair Jerome Powell to make two clear statements — that the Fed does not contemplate further rate hikes; and the Fed will not sell off any of its MBS holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized. 

These steps will provide the market greater certainty about the Fed’s rate path and its plans for the MBS portfolio and reduce volatility for traders and investors, the organizations noted.

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