Among the ramifications of paying for the tax cut extension by hiking agency guarantee fees in April could be upward pressure on consumer rates and an improvement in MBS prepayments.
“They're using homeowners to fund the tax cut extension, so what's that done is it has effectively increased the borrower costs in terms of mortgage rates to homeowners,” said Kevin Cavin, a mortgage strategist at Sterne AG.
The impact “isn't earth-shatteringly large, but in an already-fragile housing market that's something that is offsetting all of the stimulus that the Fed and the government has applied toward the housing and mortgage market,” he said. “I think it will show up in the survey rates or posted rates by originators.”
That is not to say rates will necessarily bottom out with the planned April increase in g-fees as other factors such as economic indicators and Fed stimulus programs still could put offsetting downward pressure on them, Cavin said. He noted that the Fed is continuing its “quantitative easing” reinvestment of paydowns from its MBS portfolio and agency debentures, so that its stake in the market is maintained at constant levels rather than rolling off gradually. The Fed still owns 16% of the agency MBS market, he said. “Operation Twist” also continues to drive down interest rates on the long end of the curve for the time being.
These are uncertain factors. QE has had diminished and marginal returns of late and the Fed could continue to add other forms of stimulus depending on how worried it remains about the housing market.
The planned g-fee increase “is an offset to the absolute level of primary mortgage rates,” said Cavin. However, all else being equal, it should slow prepayments. For “cuspy” borrowers with 25 to 50 basis points of refinancing incentive, the planned 10 to 15 basis point increase in g-fees could significantly reduced their willingness to refi. While the impact will probably be “very marginal” it could lead to some market nuances worth MBS investors' attention such as fewer prepays in cuspy coupons, which could increase their value.
It also could affect the relative value of agency MBS vs. Ginnie Maes. Prepayment differences between the two categories have been one of the main reasons Ginnie-Fannie swaps were near historical wides in December, said Cavin. He said they have narrowed a bit more recently in a move he believes has a lot to do with the planned g-fee hike as it reduces the Ginnie prepayment advantage slightly.
In other MBS news, Redwood is rolling out its first new Sequoia Mortgage Trust private-label deal of the year. According to Fitch's presale report, it is backed by loans from eight originators. Small originators with limited performance history originated 34% of the pool. But third-party due diligence firms reviewed all of these loans with “immaterial” findings and Fitch said it believed relative higher credit enhancement on the transaction would mitigate its originator risk. Loan-level due diligence by third parties was done overall on 71% of the pool.
Although lower than on two deals last year, the pool has a high California concentration, particularly in the San Francisco area, the core operating area for First Republic Bank (FRB). FRB originated 54.5% of the pool. Loans have five months of seasoning as compared to eight for previous transactions, the weighted average for loan-to-value ratios have improved, the weighted average credit score is slightly lower and the percentage of piggyback seconds has declined