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Would You Rather Borrow or Lend at a 7.6% Mortgage Rate?

By Alexander Payne, CFAPortfolio Manager, Agency MBS

Boston - This month, 10-year Treasury yields hit their highest level since 2007 (4.8%) and Agency MBS spreads reached the widest sustained level since 2009 (+180bps). Taken together, with origination costs and fees, 30-year fixed-rate mortgage rates are now at highs not seen since 2000 (7.6%).


MBSCHART1

Source: Freddie Mac. As of 10/12/23.

Homebuyer math gets a lot more complicated with mortgage rates 3x higher than they were in 2021. Looking at the National Association of Realtors' Homebuyer Affordability Index, there has never been a worse time to buy a home. That is saying something! Even in the summer of 2006, it was still a good time to buy a home, says Realtors.

MBSCHART2

Source: National Association of Realtors. As of 7/31/23.

Charts like these have sparked many client conversations along the lines of "mortgage rates are too high" and "7.6% cannot last." For those who feel the same and believe 7.6% is too-high of a rate to borrow, why not lend instead? Buyers of MBS are effectively mortgage lenders providing the capital for new home loans.

New production Ginnie Mae 6.5% coupon bonds are currently trading below par. That is a lot of yield for "full faith and credit" U.S. government bonds, which have virtually zero credit risk and minimal prepayment risk at discount prices.

Bottom line: In our view, with the last Fed rate hike either behind us or coming up later this year, now is a very attractive time to lock in these high mortgage rates. Not as a borrower, however, but as a lender.