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November MBS Rally Is Helpful, But Not Enough

This Month in Retail Banking

From November 10 to December 6, mortgage-backed security (MBS) prices rallied by 255 bp, which is the equivalent of a 53bp drop in the weighted-average note rate being offered in the retail channel (Figure 1). The runup was the result of several factors that were consistent with a shift in both Federal Reserve and market outlooks over the same time period.

Figure 1: Weighted Average Note Rate

First, Moody’s downgraded U.S. credit outlook to negative citing mounting debt and the rising costs of servicing it. The following week, the Consumer Price Index landed softer than expected, continuing to slow from the 7% readings earlier in the year. The Producer Price Index followed suit, displaying a drop in gasoline prices that contributed to a flat reading month over month, excluding food and energy. These developments, along with mounting geopolitical concerns heading into an election year, continued to propel MBS prices into December and indicated that Fed rate cuts may come on the early side of 2024. 

But has the rally been enough? The short answer is no. 

For the same period of time preceding the November rally, Curinos Originations data revealed a 37% drop in originations volume (Figure 2). That was despite a robust 106-bp increase in MBS prices, which translated to a 12-bp drop in the weighted-average note rate. A falloff in volume can be expected during Thanksgiving and approaching the sluggish winter months, but typically not when there’s such good news on the pricing front.  

Figure 2: Origination Volume

Source: Curinos FM Lenders Benchmark ​

The surge in prices observed since mid-October has not significantly altered the percentage distribution of either amortization type or transaction purpose among locks as considerably as one might expect given a rally of this magnitude. It seems that even a price boost of as much as 361 bp in the eight-week period just isn’t enough to move the needle in today’s market. In Curinos’ view, it will take a far greater rally, with a few Fed Funds rate drops sprinkled in, to significantly grow the number of customers who would materially benefit from refinancing. 

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