RT Journal Article
SR Electronic
T1 Drivers of Mortgage Spreads across the Business and Housing Cycle
JF The Journal of Structured Finance
FD Institutional Investor Journals
SP jsf.2020.1.116
DO 10.3905/jsf.2020.1.116
A1 Hamilton Fout
A1 Doug Duncan
YR 2020
UL https://pm-research.com/content/early/2020/10/21/jsf.2020.1.116.abstract
AB We provide a review of the underlying drivers of mortgage spreads at various points of the housing and economic cycle, with an in-depth look at the spreads between the mortgage backed securities (MBS) and Treasury rates and between mortgage and MBS rates. We provide evidence of the role of prepayment and credit-related risks, as well as lender capacity issues and large-scale asset purchases by the Federal Reserve in explaining these spreads. We also investigate recently observed differences in rates across purchase and refis as additional evidence on the role of capacity constraints in the persistent widened spreads during the ongoing COVID-19 outbreak.TOPICS: MBS and residential mortgage loans, real estate, legal/regulatory/public policyKey Findings• Mortgage spreads, especially the primary-secondary spread (mortgage rate versus current coupon yield on MBS), remain historically wide following the COVID outbreak in the US.• Increases in liquidity in the mortgage backed securities (MBS) market coinciding with the Federal Reserve’s increased MBS purchases have historically been correlated with declines in the secondary spread (current coupon yield on MBS versus Treasuries), consistent with the post-COVID surge in Fed MBS purchases and subsequent decline in the secondary spread.• Increases in the primary-secondary spread have historically been correlated with increased capacity constraints faced by lenders, for instance measured by increases in production per mortgage-related employee. The persistent widened primary-secondary spread in the aftermath of COVID-19 is consistent with this historical pattern.