Categorized | Finance and Mortgage

Mortgage-Bond Yields Take Significant Hit

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In what may be a strong indication that borrowing costs may continue to reach new lows, the yields on mortgage securities from Fannie Mae and Freddie Mac have fallen to their lowest rate in almost a year. According to Bloomberg, 30-year fixed-rate bonds from Fannie Mae fell to 3.45 percent amidst worries that the U.S. economy will slow even further, and that the current crisis in Europe will affect the U.S. as well.

While the low borrowing costs that go hand-in-hand with mortgage bond rates would lead one to believe that home sales would increase, they have actually had little to no effect. Home sales continue to decline, likely due to strict lending standards, a high unemployment rate, and a number of foreclosed properties still clogging up the market. Furthermore, there are a large number of homeowners who owe more than their properties are worth, which further adds to the attrition in the home sales rate.

There are some factors that may work to help the yields on mortgage bonds in the short term. These factors include the shortening of the contracts of loan servicers, as well as the increasing appeal of using money borrowed in short-term markets to invest in higher yielding, long term debt.

The current decline in rates has shortened the projected lives of mortgage bonds due to an increase in the number of homeowners refinancing. This increase in refinancing also causes a rise in the repayment of loans in securities held by the Fed. This increase is due to more new debt being placed into bonds that are traded in the market.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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