Mortgage demand rises amid MBS volatility

Consumer demand for home loans rose for the third consecutive week due to declining mortgage rates, following the turbulence in the financial markets caused by regional bank failures. 

But the same bank crisis is bringing volatility to the mortgage-backed securities (MBS) market, preventing mortgage rates from going down even further, according to industry experts. 

The 10-year U.S. Treasury yields declined from 4% on March 2 to 3.6% on March 21, driven by uncertainty over the banking sector’s health after the failures of Silvergate BankSilicon Valley Bank and Signature Bank and worries about the broader impact on the economy.

Historically correlated to 10-year treasury notes, the 30-year fixed rate with conforming loan balances ($726,200 or less) decreased to 6.48% for the week ending March 17, compared to 6.71% in the previous week, per the Mortgage Bankers Association (MBA) data. Meanwhile, mortgage rates on jumbo loans (greater than $726,200) fell from 6.39% to 6.30% in the same period. 

“Mortgage rates have not dropped as much as Treasury rates due to increased MBS [mortgage-backed securities] market volatility,” Joel Kan, MBA’s vice president and deputy chief economist, said in a statement. “The spread between the 30-year fixed and 10-year Treasury remained wide at around 300 basis points, compared to a more typical spread of 180 basis points.”

Borrowers took advantage of lower rates and mortgage applications rose 3% on a seasonally adjusted basis from one week earlier. According to the MBA, the refinance index increased by 5% from the previous week and purchase apps were 2% up in the same period.  

“Both the purchase and refinance applications increased for the third week in a row as borrowers took the opportunity to act, even though overall application volume remains at relatively low levels,” Kan said. 

Banks collapsing 

The latest crisis in the banking system happened when regional financial institutions were forced to sell their assets to pay for customers’ withdrawals. Over the last year, the Federal Reserve federal funds rate hikes reduced these assets’ prices, and some banks took losses when selling their assets that did not have hedges. 

Mortgage-backed securities, usually long-term investments and one of the last resources to improve banks’ liquidity, are among these assets. Silicon Valley Bank, the biggest bank to fail since Washington Mutual in 2008, took a $1.8 billion after-tax loss in the first quarter of 2023 when it sold approximately $21 billion of securities. 

SVB had a securities-investment portfolio of $120.1 billion as of December 31, 2022, including more than $16 billion in Treasury securities and some $64 billion in agency-issued mortgage-backed securities, according to Securities and Exchange Commission filings. Much of that MBS portfolio involved loans at lower mortgage rates and was marked as being “held to maturity.”  

Other banks facing liquidity issues are expected to sell their MBS portfolios, pressuring MBS prices. After SVB, Signature Bank collapsed, and Flagstar Bank bought most of its deposits and certain assets. First Republic Bank is negotiating a new rescue through a capital infusion after receiving $30 billion in deposits from 11 top U.S. banks. 

“No one knows how much of the MBS portfolio these regional banks are going to sell necessarily,” a secondary market executive at a brokerage firm told HousingWire. “And where it’s interesting is: Who will be absorbing any MBS sales, if they do come to market, as these banks are typically the natural buyers of mortgage bonds?”  

The executive differentiates the agency MBS market, backed by government-sponsored enterprises Fannie Mae and Freddie Mac, from the private label market, backed by the loans on their structures. The latter will face more challenges as they are seen as riskier investments.