Without the presidential order mandating the government-sponsored enterprises purchase securitized loans, it is possible mortgage rates could even be higher.
The economists at Bank of America Securities are still expecting the next move out of the Federal Reserve to be a reduction in short-term rates, but they have delayed the timing.
This is in contrast to the
Bank of America Securities now expects the cut to take place in July of 2027, said Jeana Curro, managing director and head of Agency MBS research, during a Monday morning panel.
"They have always been in the camp that the Fed should not cut rates, but it very well could, and that's because of political pressure," said Curro.
In contrast, J.P. Morgan has had a forecast in place for a while now calling for the Fed to first act in 2027 by raising rates, said John Sim, managing director at that company. J.P. Morgan broke from previous consensus around a rate drop much earlier.
He remembered going into meetings, "and everyone's sort of scratching their head, saying, what do you mean?" It wasn't any particular insight into the market, just noticing that inflation was starting to get ahead of itself and the Fed would be forced to do some sort of hike.
MBA Chief Economist Mike Fratantoni, who was the panel moderator noted the Treasury-mortgage spreads are currently 190 basis points, having narrowed following President Trump's tweet about having the government-sponsored enterprises buy mortgage-backed securities.
Curro noted this caused spreads to quickly narrow by 25 basis points, and between 15 basis points and 20 basis points of it was passed through to the primary market.
It was like the market "front-loaded"
"I will say, if the GSEs' had not been buying,
Although the market has already lost most of the initial rate reduction from the original tightening, because of it, spreads are still that much narrower than they would have otherwise been today.
The tricky part here is both Fannie Mae and Freddie Mac, while in conservatorship, are acting under a directive to be
Freddie Mac said at a recent B of A Securities conference that profitability is important to it, Curro recounted.
But both are likely to hit their portfolio caps in September, which will curtail MBS buys, Sim added.
"Enjoy it while it lasts, and then I think it is over," he warned. "I don't think we're seeing more buying after that."
Later, when talking about changes to the loan-level pricing adjustments, Curro noted these are a way to give borrowers lower mortgage rates. But it's done in a way which affects GSE profitability.
"Hammering down the primary mortgage rate is a way that also creates lower rates but does not directly impact profitability," she said.
Fratantoni asked about the effect of changes to Basel III regarding mortgage holdings.
Right now, 25% of originations end up on depository balance sheets, he pointed.
Sim said he believes this will marginally increase but it's not going to be a huge shift. The change in the servicing dynamic will be bigger. Banks may be keeping more mortgage servicing rights.
"There was some anticipation that maybe you'd get something that changed the risk weights on securities and for conventional versus Ginnie [Mae], and you actually didn't," Curro said. "So I think a lot of people were hopeful you'd get some kind of regulatory change that helped improve bank demand for securities. You didn't get that, but I think the risk weighting on the loan side will help retention."
Banks generally prefer to lend over purchasing securities, with two time-frame exceptions, Curro said. If recessionary concerns are on the minds of banks, they don't like to lend, they would rather have investments with a government guarantee.
The economic conditions of the pandemic motivated banks to buy back then. Concerns about a weak economy are not the base case for the near-term, she said.
