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Banking Group Proposes Solution To Promote Mortgage Affordability

Keith Griffin
Oct 13, 2023

Joint proposal would reduce spread between mortgage rates, Treasury bonds.

The Independent Community Bankers Association (ICBA) is promoting a plan that could reduce mortgage interest rates by 1% to 1.5% while improving mortgage affordability. Rates are currently the highest they have been in two decades.

The ICBA, the National Association of Realtors (NAR), and Community Home Lenders of America submitted a letter to The White House and Treasury Department outlining a plan to reduce historically high long-term mortgage rates relative to long-term Treasury bonds. The groups’ plan would reduce the historically large spread between 30-year mortgage rates and 10-year Treasuries to promote homeownership affordability.

The groups say their blueprint for action could reduce mortgage rates by 100 to 150 basis points. “More so, we believe the regulators must address the secular and structural decline in demand for mortgage-backed securities," their letter reads, going on to recommend the following actions to address the issue identified:

  1. The Federal Reserve shifting its policy to maintain its stock of MBS and suspend runoff until liquidity and the spread between the 30-year fixed rate mortgage and 10-year Treasury stabilizes, and
  2. Amending the PSPA agreements to enable Fannie Mae and Freddie Mac, on a temporary basis, to purchase their own MBS and/or Ginnie Mae MBS for a defined period of time.

“The housing shortage is structural for the time being and has a significant impact on inflation," the letter continues. "Our groups thoroughly respect the independence of the Federal Reserve but believe it should take this structural issue into consideration when evaluating strategies to attain the Fed’s desired 2% inflation target. While federal regulators do not have direct influence on many local construction issues, they can affect affordability for homebuyers and homeowners through the 30/10 spread.”

The proposal to renew activities to support demand for 30-year MBS while reducing the yields, according to the letter, will not undermine the overall impact of the Fed’s actions to increase short-term rates and combat inflation. Likewise, MBS bought at current 6% coupons would be much easier to liquidate than 1- to 3% coupons purchased two years ago. It also said the Fed’s holdings are constantly reduced by runoff from loans paying off and paying down. At a
minimum, the Fed should be buying MBS to at least offset this runoff.

Rob Chrisman, an associate of STRATMOR group and industry expert (and a columnist for Mortgage Banker Magazine), says, “The Federal Reserve’s purpose is not to help one particular segment of the economy. Mortgage rates are primarily determined by supply and demand, so to that extent, a move that impacts the demand for MBS would help rates, although somewhat artificially, and perhaps might be a short-term fix. That said, even if mortgage rates went down dramatically, it would not impact the inventory levels of homes available for purchase and might even exacerbate the lack of supply.”

The letter also points out that, “Our groups simply urge action to address the strain on liquidity in the market for MBS through the purchase and holding of 30-year fixed-rate mortgages. Doing so will help ease the nationwide affordability and lending difficulties while addressing servicing and loss mitigation challenges.”

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