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Goldman expects U.S. mortgage rates to jump 150 bps by 2019

Reuters

NEW YORK (Reuters) - Goldman Sachs analysts said on Friday they expected U.S. 30-year conventional mortgage rates to rise 150 basis points to about 5.5 percent by 2019, in step with an increase in benchmark Treasury yields and investors demanding higher compensation to own mortgage-backed securities.

Conventional mortgages are home loans guaranteed by federal agencies Fannie Mae <FNMA.PK> and Freddie Mac <FMCC.PK>, which were taken over by the federal government in 2008 during the global credit crisis.

There has been speculation the administration of President Donald Trump may push for mortgage finance reform which includes changing roles for Fannie and Freddie and possibly a phase-out of the two government-sponsored enterprises (GSEs).

In 2013-2014, a number of bills were introduced for reforming the GSEs, including one from Senators Tim Johnson and Mike Crapo. They provide potential templates for future reform, Goldman analysts Marty Young and Alec Phillips wrote in a research note.

"These proposals varied significantly according to the extent to which the government would still play a role in backstopping mortgage debt," they said.

Under the Johnson-Crapo proposal named Housing Finance Reform and Taxpayer Protection Act of 2014, Fannie and Freddie would be wound down and replaced by another government agency that insures mortgages and issue MBS with private sector entities taking first 10 percent principal losses for each portfolio of loans.

If mortgage finance reform undergoes the changes similar to the Johnson-Crapo plan, mortgage rates may climb 50 basis points due to higher costs to compensate private sector guarantors for the loans.

"Costs would also need to rise in order to pay the proposed explicit government reinsurance fee, a backstop which today is unpriced," Young and Phillips said.

They added any law on housing finance reform will unlikely be enacted before 2018.

(Reporting by Richard Leong; Editing by Bernadette Baum)