New rules announced by the U.S. Federal Housing Finance Agency (FHFA) aimed at helping homeowners refinance mortgages, caused the price of billions of dollars in U.S. mortgage bonds to drop to a six month low.
Fannie Mae guaranteed mortgage backed securities (MBS) with a six percent coupon fell over half a point, causing the yield to increase from 2.29 percent to 2.53 percent - the worst performance in a single day so far in 2011.
Coupons are the returns paid to investors, and this rate is higher than current interest rates. MBS with coupons were impacted by the new measures, which help borrowers who purchased their home through Fannie Mae or Freddie Mac and who have seen their homes drop in value, because traders expect the new rules will cause a substantial number of homeoners to repay their loan earlier.
MBS with coupons enjoyed gains earlier in the year because investors were looking for higher yielding assets, causing their price to exceed 100 cents on the dollar. This trend has reversed now, with investors losing out on income while homeowners who refinance benefit from the lower rate.
Analysts at Bank of America Merrill Lynch explained that whether the FHFA action is successful in stimulating the economy depends mainly on whether it is more beneficial to the economy to have money in the hands of investors or households. "The degree to which such a plan would stimulate the economy depends on the extent to which it is more stimulative to put money in the hands of households than it is to have money in the hands of investors such as pension plans, mutual funds, and other holders of loans and securities."
Analysts also explained the changes made to Harp (home affordable refinance program) will help stabilize the housing market over the long term more than it will stimulate the economy in the short term. The new FHFA rules mean that both Fannie and Freddie will discontinue warrenties that have caused some lenders not to write high loan to value m mortgages. And, borrowers that have loans for more than 125 percent of the value of their house will for the first time be eligible for Harp.
The FHFA rules will also eliminate some upfront financing fees for shorter term 20 to 30 year mortgages which will increase the rate at which capital is paid off, and help homeowners build equity in their homes.
David Semmens said "I think it will make people more incentivised to stay in their homes." Semmens, a US economist at Standard Charter, explained: "Structurally, long term, this could be a good thing but it changes very little in the short term.
