“… government-backed mortgage bonds are getting supersized as homes grow more expensive, a change that could weigh on the performance of the securities next year. ” writes Adam Tempkin at Bloomberg….(Bloomberg)
- Why is this happening? The FHFA increase conforming limits by almost $100,000 last month to $647,200. In high cost areas the limit is almost a million dolllars.
- Why does this matter? Tepkin writes that “Bigger loans make mortgage bonds riskier for investors. When homeowners have larger loans, they become more likely to refinance even with relatively small declines in interest rates, because the monthly savings in dollar terms is greater than it would be for a smaller loan.
- Complicating matter more. The Federal Reserve has been buying $40 billion MBS a month. Tapering has already begun and could end even quicker than originally announced last month. As Tempkin writes, this will leave a big hole in the MBS market, “The Fed tended to buy securities with higher average loan sizes compared with the rest of the market, so as it scales back purchases, the mortgage sizes in bonds available to investors will probably grow”
I think its important to never get too confident in any investment. I think these concerns are valid and something everyone should think about. However, at the same time when housing is producing double-digits there won’t be a shortage of money available. (ahem…)