In recent speeches, Fed Presidents William Dudley and Eric Rosengren have acknowledged that the Fed’s large-scale purchases of mortgage-backed securities (MBS) have become an increasingly important tool of monetary policy.
The intent is for these purchases to lower yields on MBS, which in turn will cause the 30-year mortgage rate to decline.
According to a recent article by Andreas Fuster and David Lucca, economists at the New York Fed, the Fed’s plan has worked, but with one hitch: MBS yields have decreased more than the mortgage rates. If not, the 30-year mortgage rate would be as low as 2.6 per cent.
According to Freddie Mac, the national average 30-year fixed rate mortgage is 3.35 per cent.
One lesser cause of the spread between rates and yields is the higher guarantee fee for lenders, which the economists claim accounts for about 25 to 30 basis points of the gap.
However, the rise in a little-known metric – Originator Profits and Unmeasured Costs – indicates that this gap has vastly increased the profitability of lenders.
The authors explain what this term actually means:
The OPUC measure captures the loan originator’s average revenue from selling a mortgage in the agency MBS market (after accounting for the guarantee fee) as well as the revenues from servicing the loan and from points paid upfront by the borrower. As the name implies, OPUCs represent either lender costs (other than the guarantee fee), lender profits, or a combination of the two.
And they’ve been exploding since late 2011:
Photo: Liberty Street Economics
The economists “tentatively concluded in the paper that these costs don’t seem to have changed sufficiently to offset the increase in OPUCs, suggesting that profits in mortgage origination have likely increased.”
Lenders could lower rates – but they’d be overwhelmed by the demand for loans, especially for refinancing applications.
Instead, they’ll retain increased profitability until volumes decline or rates decrease.
Read the full article at Liberty Street Economics.