Why Fed action may be limited to supporting mortgages

Fed officials may continue to restrict mortgage-backed securities activity to reduce mortgage-backed securities activity Industry hopebut that doesn’t necessarily narrow the spread that contributes to U.S. Treasuries interest rate fluctuations Just as trade groups had hoped.

That’s what a panel of industry experts had to say about the Fed’s policy Friday at a conference on information management’s online mortgage servicing rights.

“I think the general-purpose spread has to come down, and it really doesn’t exist until people are sure the Fed has done its job,” Scott Tweedy, vice president at Pulte Mortgage’s Capital Markets Authority, said of officials tightening short-term policy. will fall.” – Term rates.

Although there are some voices in the industry calling for Fed or government-linked mortgage investors Fannie Mae and Freddie Mac Buying MBS to address interest rate volatility, panel members believe such action is not in the interest of policymakers at this time.

Conrad DeQuadros, senior economic adviser at Brean Capital, said during the panel discussion that the Fed ultimately “wants to return to a balance sheet dominated by Treasuries.”

He said that if it were not for the banking crisis in March, the Fed might be more aggressive in selling MBS. The crisis has highlighted the fact that selling older, lower-coupon bonds, of which the Fed has many on its balance sheet, can lead to losses.

DeQuadros said that while the Fed does not face the same pressures related to capital requirements and other regulations as banks, aggressive MBS sales can have adverse accounting effects.

As long as policymakers believe there is a need to cool inflation, they are unlikely to buy MBS. Only by limiting housing inventory relative to demand will their actions and associated targets not put greater downward pressure on the residential market.

“The Fed tried to destroy the housing market, but the lack of supply actually turned the tables,” quipped Nik Shaw, CEO of Home LLC and panel moderator, adding his own take on the panel’s consensus view.

While the supply side is somewhat immune to Fed pressure, it could have an impact at some point given the following: Builders have been offering rate concessions to address affordability issues. If interest rates rise high enough, these offers could hurt profits.

At that point, “in order for builders to protect their gross margins, they will slow down production,” Tweedy said.

Forecasts generally continue to point to the possibility of a recession next year, which would make interest rates lower or stable more likely than rising, although panelists noted that previous forecasts calling for such an economic shift earlier were wrong.

In the event of a general economic downturn, policymakers may consider buying MBS, but despite Some credit issues are starting to show up in the mortgage market They are not on this order of magnitude, the team members said.

“The only thing that’s lowering interest rates is a weakening economy,” Tweedy said, noting that so far rising delinquencies on FHA-insured loans and credit cards don’t equate to that pressure.

But some panelists said they agreed with the recent consensus among some in the market that the Fed may have reached or is nearing the end of its tightening cycle.

“I think we’re at a transition point where, starting this month, we’ll start to see the results of the Fed’s rate hikes,” said Vince Zenner, senior vice president of Guaranteed Rate Portfolio Management.

Nicholas Maciunas, director of research at MBS, said that in the long term there was a 40% chance that the economy would have a soft landing without excessive shocks, while there was a 60% chance of a “tepid boil”. frog” situation. JPMorgan cited its firm’s forecast.

In the latter case, “there will eventually be some problems in the real estate market, but people will feel it slowly,” he said.

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