can someone please explain why the primary secondary spreads have been widening since the credit crunch? i understand that some of this is caused by increased refinancing, but i still don’t understand how increased refinancing leads to a wider spread? or if there are any other variables explaining this? thanks a lot!
What spreads are these? Swap spreads?
its the difference between the primary rate (the rate that banks charge customers for mortgages) and the secondary rate (the coupon that goes to the MBS investors)
It’s called the prime rate, not the primary rate, and banks don’t really charge the prime rate for mortgages. I’m not sure exactly what you are asking.
If you could show the data you are using, perhaps we could help better interpret it.
No, he’s right about the primary rate. It’s not the same as the prime rate. The primary rate is the mortgage rate in the primary market; the secondary rate is the mortgage rate in the secondary market. The spread is simply the difference between these rates, and it reflects market conditions in that riskier markets have larger spreads. “Have been widening” is suspicious language, though, because spreads did widen and have been falling for a while (they’re still high).
This should provide you with some basic insights: http://www.interactivedata.com/uploads/File/Primary%20and%20Secondary%20Mortgage%20Rates.pdf
[forehead slap]
Thanks, aaronhotchner.
Either way, I agree the “have been widening since the credit crunch” statement didn’t make sense. There isn’t a spread out there that’s wider than that immediate post-Lehman explosion.
thanks guys, i guess im just trying to understand why they increased right after the crisis. i understand that they may be falling now, but to my understanding, overall, these spreads are still way higher than what they used to be before the credit crunch.
the link you sent is useful, thanks aaron! so is it basically increased servicing fees and g-fees that caused this? because of higher delinquincies?
Essentially, yes. Large market movements in either direction will lead to adjustment costs (transaction costs, hedging costs, etc.). Mortgage lenders are in a position of offering the same rates as everyone else simply by necessity as a player in the market, and they only stay solvent by capturing a larger rake off the top before passing off to MBS investors in highly volatile markets.