As illustrated by the chart below, our primary mortgage yields continue to be attractive in comparison to the agency MBS yields. The gap between primary and secondary has remained wide over the last three years. The main cause of higher primary market yields can be attributed to the guarantee fees FNMA and FHLMC charge to take on the credit risk of mortgage originations. This forces up mortgage rates because originators must require higher note rates to meet profit objectives.
In addition to relatively high yields on mortgage originations, funding costs
Primary vs. Secondary Spreads
remain very low supporting wider margins on loans being funded with advances. The first graph on the next page illustrates the historic level of interest rate volatility, which is a key determinant of the option cost associated with callable advances. Lower interest rate volatility brings down the cost of the call option and contributes to a wider net interest margin.
The tables to the right illustrate the funding costs associated with the advances used for the 30-year strategy and details the difference advance types that were selected to fund this mortgage. This scenario utilizes 40% callable rate advances and 60% fixed rate advances.
Our 15- and 30-year strategies (linked below) also demonstrate how the balances perform in a down 100 and up 200 rate environment. We are able to provide a funding mix that has the flexibility to manage varying mortgage prepayment speeds and with that mix of callable and fixed rate advances it can provide stability throughout different rate situations.
Credit Suisse Interest Rate Volatility Index
Funding Mix | Callable and Fixed Advances
see our full analysis
15-year Funding Strategy
30-year Funding Strategy