U.S. government-backed mortgage bonds are heading toward their longest monthly slump since 1999 as concern mounts that the Federal Reserve will begin paring its debt purchases even as the steepest rise in home-loan rates in at least 40 years slows the housing rebound.
President Barack Obama is escalating the fight over how to revive the housing market, a sector of the economy that has dragged down growth for six years running, eroded consumer confidence and wiped out $7 trillion in American wealth.
After posting their worst returns since 1999, government-backed mortgage bonds are starting 2013 with losses on speculation the end of Federal Reserve purchases is in sight and as homeowner refinancing roils the market.
Freddie Mac’s decision to force Bank of America Corp. to repurchase $330 million of mortgages from its securities may result in a profit for the lender while triggering investor losses, according to Credit Suisse Group AG.
Annaly Capital Management Inc.’s Wellington Denahan, head of the largest mortgage real-estate investment trust, told investors less than three months ago that reports REITs could threaten U.S. financial stability were as misleading as the media frenzy over shark attacks in 2001.
Prices in the market for Fannie Mae and Freddie Mac mortgage bonds are incorrectly forecasting a 55 percent chance of a “government-induced refi spike” in the next year, according to Credit Suisse Group AG.
Derrick Bulaich locked in a home- loan rate of 4.6 percent last week, prompted by a surge in borrowing costs as investors speculated the Federal Reserve would pull back from bond buying. Bulaich, who said he wishes he’d acted sooner, still plans to complete the purchase today of the four-bedroom Sacramento home because values in the city remain 42 percent below their 2005 peak despite recent gains.
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates set record lows after the Federal Reserve said it would buy more U.S. government debt as its housing-bond holdings pay down.
The $1.2 trillion of mortgage-backed securities the Federal Reserve has amassed to stoke economic growth is creating a potential firewall that dealers say is shielding the bond market from a rapid decline as policy makers debate scaling back debt purchases.
Lenders could lose $168 billion if banks sell loans into the Public-Private Investment Partnership at market prices instead of their balance-sheet valuation, Jamie McGee and Margaret Chadbourn of Bloomberg News report, citing estimates in regulatory filings.