Declining Mortgage Rates Hit Mortgage Investors

October 08 00:00 2011

New York, October 8 ( – There was a rush of homeowners wanting to refinance their mortgages last month, which indicated that the efforts to bring down interest rates were having the desired effect. However, the refinancing trend had a negative effect on the $5 trillion mortgage-backed securities market where people had invested in bonds anticipating that activity would remain low.

However, late Thursday Fannie Mae and Freddie Mac, the two U.S.-controlled agencies that buy mortgages from banks and repackage them to sell to investors, informed mortgage investors that the rate at which homeowners prepaid their 30-year fixed-rate mortgages went up by almost 30% in September. Nomura Securities noted that this activity resulted in $62 billion in mortgages being paid in the month.

In order to take benefit of the relatively high interest rate, many investors in mortgage-backed securities paid more than the face value of the loans. They now stand to lose money and be left with lower-yielding options for their cash when the mortgages behind these securities are refinanced.

Mortgage backed securities which are tied to loans that pay 3.5% to 4.5% interests have taken the biggest hit. Bryan Whalen, a managing-director at TCW, a Los Angeles asset-management firm said that “Rates went lower, and people that could refinance went to the front of the line. Lenders picked the low-hanging fruit, where they know people had good credit.”