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Funding-Strategy – Details

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30-Year Fixed-Rate Mortgages at 4.50%

July 01, 2013

Over the last few weeks rates across the board have ascended quite rapidly, and may have settled at the current level as the market has had time to digest the June FOMC press conference. The national average 30-year fixed-rate mortgage has increased by about 100 bp since May. Using long-term wholesale advances as the source for funding mortgage originations offers members of the Federal Home Loan Bank of Boston the opportunity to generate attractive spreads even as rates are on the rise. By locking in the spread on the mortgages held in portfolio, a member has the potential to hedge the risk of rising interest rates and minimize the volatility of net interest income.

If rates rise, it is likely prepayments would slow, thereby extending the average life of the mortgage. If rates fall, prepayments would likely accelerate, leaving excess funding to be reinvested at prevailing market rates. These strategies assume the rate changes ramp up evenly over the first 24 months and then remain at that level for the remaining term.

Below are three examples of common funding scenarios for fixed-rate mortgages.

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