Our portfolio lending strategy for the fourth quarter is consistent with previous quarters. Primary mortgage yields continue to be attractive in comparison to agency MBS yields.
The key driver of the higher primary market yields are the guarantee fees FNMA and FHLMC charge to take on the credit risk of mortgage originations. Originators must require higher note rates to meet profit objectives. 

As shown on the below, our yields remain high on mortgage originations. However, our low funding costs lead to wider margins on loans being funded with advances. The Credit Suisse graph below represents levels of interest rate volatility which is significant to the call options connected with our callable advances. The lower the interest rate volatility, the lower the cost of the call option. Forty percent of the advances used in the 30-year mortgage scenario (linked at the bottom of this strategy) were callable advances. 

Primary vs. Secondary Funds

Credit Suisse Interest Rate Volatility

Funding Mix on 
30-year Mortgages
The tables below illustrate the funding costs associated with the advances used for the 30-year strategy and detail the different advance types that were selected to fund this mortgage. This particular scenario included more fixed rate advances than callable rate advances.

30-year Mortgage Detail and Advance Funding Mix


The graphs below demonstrate how the balances perform in the down 100 and up 200 rate environments. As shown in each graph, we are able to provide a funding mix that has the flexibility to manage varying mortgage prepayment speeds. This mix of callable and fixed rate advances provide stability throughout different rate shocks.
 
The 15- and 30-year funding strategy links below provide low-cost funding while maintaining sufficient spreads.  

Flexible Funding Helps Manage Varying Mortgage Prepayments

See our full analysis:
15-year Funding Strategy
30-year Funding Strategy