by Calculated Risk on 2/05/2024 10:08:00 AM

Today, in the Real Estate Newsletter: Lawler: Update on Mortgage Rates and Spreads

Brief excerpt:

From housing economist Tom Lawler:

For the second consecutive year 2023 saw high levels of volatility in the US fixed-income markets in general and the mortgage/MBS markets in particular. Unlike in 2022, however, key Treasury rates and mortgage/MBS yields ended 2023 close to where they began.

30-Yr CCMBS: Yield on “notional par” MBS derived from price for coupon closest to but below par and price for coupon closest to but above par.

30-Yr FRM: Optimal Blue 30-year index for borrowers with LTV<=80 and FICO>740.
...
Much of the “angst” in the MBS market over the last year and a half (aside from high interest rate volatility) was associated with “extension risk” – that is, the slowdown in MBS prepayments when interest rates increase. The sharp increase in mortgage rates following the uber-low rates of the previous few years resulted in a huge number of mortgages with rates well over 300 basis points below current market rates. That had not been seen in over 40 years, and most prepayment models had little or no data on how slow mortgage prepayments could get. In turned out that the answer was “really low” and lower than many models projected, meaning that MBS backed by these low-rate mortgages saw their duration extend by much more than many MBS investors had expected, leading to much larger than “expected” mark-to-market losses.

There is much more in the article.