Mortgage loan rates have been rising rapidly, in line with the market yield on 10-year U.S. Treasury bonds, which have risen to 2.79% Wednesday afternoon from 1.70% at the end of April. The market has been anticipating a decline in the Federal Reserve's net purchases of long-term bonds. The Fed, as part of its "QE3" effort to hold-down long-term interest rates, has purchased $40 billion in long-term mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds each month since last September. The Federal Open Market Committee is expected by many economists to gradually taper its bond-buying after the committee's next meeting on September 17-18. The resulting media hysteria over expectations of the Fed curtailing its monetary stimulus will most likely resume after Labor Day and hit a fever pitch in the second week of September. Also on Wednesday, the National Association of Realtors said its Pending Sales Index declined to 109.5 in July from 110.9 in June, although the index was still 6.7% higher than a year earlier. NAR chief economist Lawrence Yun said the small decline in existing-home sales "is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown." But Yun also said "higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West." "So far in 3Q, higher mortgage rates have driven mortgage app volume down 36% Q-Q (on avg.), and we anticipate banks will see a sharp decline in mortgage banking fees this quarter as a result," Jefferies analyst Ken Usdin wrote in a note to clients Wednesday.
More Skin in the Game
In industry news on Wednesday, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and other federal agencies proposed that aside from "qualified residential mortgage loans," or QRM, mortgage loan securitizers should be required to retain 5% of the credit risk of the loans the sell through securitizations. The rules are subject to a 60-day comment period, but as we have seen with so many rules proposed to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it may take much longer for the final rule to be set.