Our Portfolio Lending Strategy continues to show wide spreads this quarter mainly due to long-term advance rates not rising as quickly as short-term advance rates.

The top graph shows how primary mortgage yields continue to be significantly better in comparison to agency MBS yields. This gap between the primary and secondary market yields remains wide due to large guarantee fees being charged by FNMA and FHLMC to take on the credit risk of mortgage originations.

In addition to relatively high yields on mortgage originations, funding costs continue to stay low supporting wider margins on loans funded with advances. The bottom graph illustrates the historic level of interest rate volatility, which is a key determinant of the option cost associated with callable advances. Lower interest volatility brings down the cost of the call option and contributes to a wider net interest margin.

Initial Transaction Details

The tables illustrate the funding costs associated with the advances used for the 30-year strategy and details the different advance types that were selected by the model to fund this mortgage. This scenario utilizes equal amounts of callable rate advances and fixed rate advances. The use of callable advances provides wider margins as rates decline. In using both types of advances though, it gives good protection whether rates rise or fall.

The set of graphs show how the balances perform in a down 100 and an up 100 rate environment. As shown in both graphs, we are able to provide a good funding mix that has the flexibility to manage varying mortgage prepayment speeds.

see our full analysis:
15-year funding strategy
30-year funding strategy