Posted on 01/13/2013 10:41:36 AM PST by whitedog57
What is your prediction on mortgage spreads after the private sector almost vanished by 2008? The red line denotes non-GSE market share and the green line denotes GSE market share (e.g., Fannie Mae, Freddie Mac, etc.).
The government essentially became a monopolist (although the government entities including the FHA compete with each other for market share). There are barriers to entry that would promote competition with Uncle Sam – it is called Dodd-Frank and the Consumer Financial Bureau. The vast majority of residential mortgages will continue to be purchase and/or insured by the Federal government.
But after the effective nationalization of the mortgage markets by Uncle Sam, did mortgage spreads stay the same, increase or decrease?
Mortgage spread in this case is defined as the BankRate 30 year fixed-rate mortgage rate minus the relevant GSE or Agency current coupon rate.
First, let’s look at Ginnie Mae, the securitization arm of the Federal Housing Administration (FHA). After remaining low through most of 2007 and before, the Ginnie Mae current coupon spread now sits 136.5 basis points, which is significantly higher than the 15 to 25 basis points prior to Q4 2007.
We can also examine the Ginnie Mae 30 year current coupon spread versus the Mortgage Bankers Association 30 year effective FHA rate. However, the MBA’s rate only goes back to August 2007, but it shows the rise in the spread from August 14, 2007 of 0.6583 basis points to today’s spread of 137.58 basis points.
Second, here we have Fannie Mae. Currently, their current coupon spread is at 120.5. This is lower than Ginnie Mae’s current coupon spread, but still considerably higher than their near zero spreads prior to Q4 2007.
Finally, we have Freddie Mac weighing in at 114.25 basis points. Like their sibling Fannie Mae, they too had virtually zero current coupon spreads in the years prior to Q4 2007.
Just considering current coupon spreads, Ginnie Mae (FHA) is the most costly securitizer of mortgage loans while Freddie Mac is the least costly. Although all three have current coupon spreads substantially higher than pre Q4 2007.
So, has the government monopoly of mortgage securitization resulted in reduced spreads? No. Then again, risk measures such as the VIX (for the S&P 500 index) exploded in late 2008 but has recently returned to 2004-2006 levels. Now, we can’t really compare mortgage spreads to the S&P 500 volatility index directly, but it does show that while the stock market risk has returned to pre-crisis VIX levels, government mortgage spreads remain very high and significantly above pre-crisis levels.
True, The government stepped in when the private sector went missing in action. But like the film “The Godfather,” you have to pay for the protection you receive from Uncle Sam (or The Godfather). I guess this is the favor that was returned: higher mortgage spreads.
Mortgage spreads, save for later.
What the banks lose in higher mortgage spreads, they make up by having a guaranteed purchaser, plus the Fed is paying handsomely to park funds overnight - another windfall of free GSE money.
“Obama/Dems seize the mortgage market and spreads rise. What a shock!!!!”
Good point except that Fannie and Freddie were seized during the Bush administration.
The reason that we had near zero rates prior to 2008 was do to the shadow banking sector’s financial engineering that was fueling the housing bubble. When the bubble blew the fools that were providing that financing blew up with it.
Where do people get the idea that such low rates are healthy in the first place? It largely means that savings are being treated like trash.
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