Orion’s brokers close home loans, one by one. But then what? Most U.S. home loans, notonly from Orion but every broker and lender, end up in the nearly $9 trillion market for residential mortgage bonds with government backing. Others do into “private label” securities composed primarily of jumbo or non-QM loans, while others still are held in bank portfolios.
The “agency” mortgage-bond market resembles the roughly $25 trillion Treasury securities market in that it provides some of the lowest borrowing costs available. TheU.S Government has never defaulted on its debt. Defaults are considered unlikely with Agency mortgage-backed securities because the bonds come with U.S. government backing, either implicitly or explicitly.
Last week Fitch Ratings cut the U.S. debt rating, pointing to “fiscal deterioration” expected over the next three years, the government’s large and growing debt burden, the “erosion” of governance, including through “repeated debt limit standoffs and last-minute resolutions,” and even the January 6th insurrection.
A day later Fitch also lowered the top AAA debt ratings of housing giants Freddie Mac and Fannie Mae by a notch to AA+, saying, “firms continue to benefit from meaningful financial support from the U.S. government,” but also that the move wasn’t driven by a deterioration in credit, capital or liquidity at the firms. Fitch has become the first major credit-rating firm to lower the U.S.’s AAA creditrating to AA+ since S&P Global cut its rating in 2011.
The good news is that most U.S. homeowners already refinanced during the pandemic, and Orion and brokers around the nation helped. And so rate increases by the Federal Reserve, mortgage rates increasing, and now this downgrade (which hasled to slightly higher rates) are not having a huge impact. It also should limit any reverberations from Fitch’s decision to no longer apply its top ratings to U.S. debt.
For many years investors have trusted the default-free reputation of U.S. Treasury securities, and to some extent mortgage-backed securities issued by Freddie Mac and Fannie Mae, or backed by HUD. (Brokers know that Freddie Mac and Fannie Mae don’t make home loans, but they do buy ones that fit their tighter lending criteria and issue pools of bonds with the implicit backing of the U.S.government.) As Fitch points out, Congress continues to use U.S. credit ratingsas a “bargaining chip” in negotiations.
Here in August the U.S. losing its top AAA debt rating for a second time in roughly a decade is thought to be temporary. But it is having an impact on interest rates, including mortgages. Mortgage rates and prices are tied more closely to longer-dated Treasury yields such as 5–10-year maturities.
We mention this because mortgage rates may take their cue from Treasury yields after this week’s heavy new supply. The Treasury announced that it expects to borrow about $1 trillion in the third quarter through nearly weekly auctions, an amount that is the largest ever for that time frame and a potential source of pain for investors. And this will probably impact mortgage rates more than Fitch’s move.
.jpg)
