Vital Statistics:
Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are down.
Mortgage REIT AGNC Investment reported earnings last night, and their presentation kind of shows how much things have improved in the mortgage space. Mortgage REITs are the investors in mortgage backed securities, which means they are often the other side of the trade in a mortgage transaction. The amount they are willing to pay for MBS directly affects the rates that lenders can offer to borrowers.
The yield on current coupon mortgage backed securities ended 2023 at 5.25%, which is way lower than the 7% we saw during the dark days of October 2023.
The improvement in rates was due to a double whammy of falling Treasury yields and tightening MBS spreads. MBS spreads are incremental return that investors require in order to entice them to hold MBS instead of Treasuries. They may have the same credit risk (i.e. zero), but mortgage backed securities have much higher interest rate risk due to negative convexity. You can see how much spreads have tightened over the past quarter:
MBS spreads are a function of market bond market volatility, which has been falling, as evidenced in the ICE / Bank of America MOVE Index. While the index is a lot lower than it was earlier in 2023 (that big spike was due to the fall of Silicon Valley Bank), it is still higher than it was pre-rate hikes. In other words, it can fall a lot further, which will help compress MBS spreads and lower mortgage rates.
Falling rates, falling spreads and falling volatility all combine to create a better mortgage rate environment. AGNC reported that prepayment rates fell in the fourth quarter, however they bumped up their forecast for prepays going forward. When mortgage REITs talk about prepayment rates, you can think of it as a proxy for refinance activity and people moving.
Bottom line: AGNC’s earnings report shows that conditions are improving, which bodes well for origination activity in 2024, and also for the Spring Selling Season, which is right around the corner.
The number of mortgage loans in forbearance declined to 0.23% in December, according to the MBA. “Forbearance as a loss mitigation option is diminishing,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “While forbearance is a powerful tool for delinquency surges resulting from natural disasters or major disruptions such as a pandemic, today’s borrowers are not experiencing widespread financial distress. The overall performance of servicing portfolios – particularly government loans – declined in December. Factors such as seasonality, a changing labor market, resumption of student loan payments, and the rise in balances on other forms of consumer debt are likely at play.”
Bill Gross has a message for the Fed: Stop quantitative tightening and cut rates.
