Organizations push MBS policy shifts to ease real estate industry woes

Action on mortgage-backed securities is ‘critical to address homeownership affordability and lending challenges’

For the second time in a week, a coalition of industry groups has banded together to ring alarm bells to the federal government about the flagging real estate market and once again recommending actions to stem the tide.

The Community Home Lenders of America (CHLA), the National Association of Realtors (NAR) and the Independent Community Bankers of America (ICBA) sent a letter to the Biden administration that outlines steps to reduce the historically large gap between 30-year mortgage rates and 10-year Treasury rates.

That spread, as of the publication of the joint letter, sat at slightly more than 300 basis points, while the historic norm is around 150 bps. According to the three organizations, narrowing this gulf via their recommendations could reduce mortgage rates by 100 to 150 bps.

The associations’ proposal revolves around addressing what they view as a “secular and structural decline” in the demand for mortgage-backed securities (MBS).

“Housing accounts for nearly 20% of GDP (gross domestic product) and affects all homeowners and renters, especially those in underserved and rural communities,” reads the letter, which is addressed to Lael Brainard, director of the National Economic Council, and Janet Yellen, secretary of the U.S. Department of the Treasury. “Action is critical to address homeownership affordability and lending challenges and reduce impediments for servicers to loss-mitigation efforts to keep defaulted borrowers in their home.”

The groups’ suggestions are twofold. First, they urge the Federal Reserve to shift its policy to maintain its current stock of MBS. They also want the Fed to suspend runoff until the spread between the 30-year fixed mortgage rate and the 10-year Treasury rate stabilizes.

“The Fed’s holdings are constantly reduced by runoff from loans paying off and paying down,” the groups argue. “At a minimum, the Fed should be buying MBS to at least offset this runoff.”

The letter goes on to say that “the housing shortage is structural for the time being and has a significant impact on inflation. 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 second prong of the groups’ proposal involves amending the government-sponsored enterprises’ preferred stock purchase agreements to allow Fannie Mae and Freddie Mac to buy their own securities, or Ginnie Mae MBS, for a defined and temporary basis.

“For some 40 years, the Federal Reserve and Fannie Mae and Freddie Mac have acted as buyers of last resort for MBS to stabilize mortgage rates at times and ways that are appropriate,” the letter reads. “U.S. banks, foreign central banks, overseas banks and insurance companies have recently moved away from buying MBS. … Historically, the GSEs’ portfolios have acted as ‘shock absorbers’ to disruptions in the MBS market. We believe this is an appropriate time for the Federal Reserve or Fannie and Freddie to step in and address this secular decline in demand for MBS.”

The groups are swift and clear to agree that “the Federal Reserve’s monetary stance and inflation-fighting strategy are appropriate,” and that “reasonable limits on the GSEs’ portfolios are appropriate and necessary.” But they urge that further action is needed to deal with the liquidity woes in the MBS market.

“Doing so will help ease the nationwide affordability and lending difficulties while addressing servicing and loss-mitigation challenges,” the groups state.


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