Where Have All The Spreads Gone? – Mortgage Spreads Remain HIGH After October 2008

Confounded Interest ^ | 03/12/2013 | Anthony B. Sanders

[whitedog57]

One of my favorite mortgage spreads to look at is the spread between retail mortgage rates (such as the Bankrate 30 year average fixed-rate) and the government agency/enterprise current coupon rates.

Prior to November 2008, the spread between the retail mortgage rate and the Ginnie Mae current coupon rate was 22.60 basis points (median).

But after October 2008, the median spread skyrocketed to 107.31 basis points.

While the spreads vary over time, that is almost an 85 basis point increase in the spread. AND the correlation is falling.

Why is this curious? Because the same thing happened to Fannie Mae and Freddie Mac spreads, but Federal Housing Finance Agency (FHFA) Director James B. Lockhart III placed Fannie and Freddie into conservatorship on September 6, 2008. Not the FHA.

Fannie Mae Current Coupon Spreads

Freddie Mac Current Coupon Spreads

Of course, as Fannie Mae, Freddie Mac and the FHA raise their guarantee fees, we would expect the spread to rise. But 85 basis points?

Here is Paul Krugman’s op-ed in the NYTimes from July 2008 where he asked “How worried should we be?” If you are worried about rising spreads, then Krugman should have been worried.

Perhaps Johnny Rivers can re-record “Where have all the flowers gone?” as “Where have all the spreads gone?”

[whitedog57]

TBTF banks pocketing bigger fees?

[SaxxonWoods]

I watch the spread between the 10 year US Treasury and the 30 year mortgage.

The lowest I’ve seen it get (2006-7) was around 1.4%.

Today, the 30 yr is at 3.72% and the 10 yr bond is 2.02 for a spread of 1.7%. Not the lowest, fairly high but not the highest either.

Lenders expecting higher rates is probably the answer. The 10 year has made a significant move up in yield lately.

Mortgage lenders react to rates, they don’t set them. Bondholders set rates through the auctions. At least that’s how I see it.