Fed Gearing Up to Unwind Balance Sheet: What it Means for the Mortgage Market

There has been a lot of talk lately about the Fed beginning to unwind the $4.5 trillion on its balance sheet.

The news first broke last week when the FOMC minutes revealed it was a topic of discussion at their March meeting, and many experts are saying that the process will likely begin this year.

That could mean a significant shakeup in the mortgage market.   

The Fed has been the largest purchaser of Mortgage Backed Securities (MBS) since it entered the mortgage market after the financial crisis in 2008. Right now, it has about $1.75 trillion of holdings in MBS. That’s around 30% of the market, which is a staggering amount for one investor.

Lenders could see slowdown in liquidity

Lenders rely on the capital from the secondary market to create liquidity. That’s because instead of loaning out funds to borrowers and waiting thirty years to get all their money back, they sell mortgages on the secondary market. This frees up money for them to give to borrowers.

Click here to get today’s latest mortgage rates (Apr. 13, 2017).

If one of the biggest players on the market were to leave, that could cause a slowdown as fewer funds are available to lend out. The best scenario would be for various players to step up and fill the void, but a decline in some securities is most likely unavoidable.

Borrowers likely to deal with higher rates

With a decrease in the demand for MBS, prices could go up causing mortgage rates to rise. Mortgage rates were already projected to move higher in the long-term, based on the Fed’s gradual adjustments to the Federal Funds rates, so this news puts extra pressure on those projections. With rates recently falling to 2017 lows, that means anyone who is in the position to take action, should do so sooner rather than later.

Here is what our EVP of Secondary, Marc Kaplowitz had to say about these recent developments:

“The spread between mortgages and treasuries widened post release of FED Minutes and Dudley’s prepared testimony. The market take-away from both was a more aggressive stance than the fixed income markets had expected. Outright sale of mortgages would certainly add pressure to the mortgage sector but there will be a self-limiting component due to the slowdown in prepayment speeds (Fed reinvestment eases -> Rates rise -> Prepays slow -> Fed inherently has less to reinvest).”

Click here to get today’s latest mortgage rates (Apr. 13, 2017).

The next time the FOMC meets is on May 6. There are a handful of speaking engagements from Fed officials before then, but it’s unlikely any greater detail about the unwinding program will be divulged. That means that for now, we wait.

from Total Mortgage Underwritings Blog http://ift.tt/2py5SSf