A recent trend that is popping up is showing that fewer homeowners are refinancing their mortgages as interest rates climb. This, in turn, is helping to decrease sales of home-loan bonds without government backing. This is all coming together to make new deals safer, according to Moody’s Investors Service.
Mortgages used to buy homes historically default less than replacement loans, partly because of the greater vigor employed by lenders in underwriting the first category of debt, the New York-based ratings firm said today in a report.
“It’s a very clear trend we’ve seen,” said Kruti Muni, an analyst at Moody’s who worked on the report, which addressed the quality of securities tied to “jumbo” mortgages, the only type now being packaged into non-agency bonds.
Federal Reserve Debt Buying
A slowing of the Federal Reserve’s debt buying and an improving economy has driven the average rate on typical 30-year mortgages to 4.5 percent from a record low 3.47 percent in December 2012, according to Mortgage Bankers Association data. Fewer refinance mortgages should be a “credit positive” for new jumbo-mortgage bonds.
Most purchase mortgages are usually given to borrowers with higher credit scores. This doesn’t mean that people with better credit scores will end up being a better overall deal. Lenders also “have typically subjected purchase obligors to more stringent credit reviews and property valuations since purchase borrowers have no history of residing in the home,” the firm said in its report.
Tighter underwriting standards since the 2008 financial crisis and the introduction last month of “qualified mortgage” rules creating new legal risks for lenders may mean the difference isn’t as pronounced in the future.