Dear Friends,  It’s been quite a whirlwind this year on the rate front.  Obviously we have all seen the drastic change in the mortgage rate marketplace since the first of the year and I wanted to give some account as to what is going on:

  • Over the past few years the Federal Reserve has had a very loose monetary policy that was in part implemented when COVID first became know to the world.  At that moment in time it was very unclear as to what the impact on the world economy would be.
  • To assist with keeping the markets orderly they continued to artificially keep the Fed funds rate at historic lows (which started over a decade ago during the great recession) AND they announced that they would become buyers of huge quantities of MBS (mortgage backed securities) to keep the mortgage market liquid and again to maintain very low rates so the economy would continue to function while COVID ran its course.
  • When a “new” huge buyer of these securities enters the market that increases the demand for mortgage bonds and had a very positive impact on the rates offered to consumers. They were not only purchasing about $45 BILLION a month in securities they were also reinvesting the proceeds from what they already owned to buy even more then that.
  • Downside of this policy is that they accrued multiple TRILLIONS of dollars of MBS on their balance sheet that at some point has to be unloaded and sold on to private investors (normalizing the market).
  • Last week the Fed announced that they would become SELLERS vs BUYERS in the mortgage market and has begun to sell off about $35-45 Billion per month in MBS securities from their balance sheet.  They are also no longer reinvesting those proceeds into additional securities so that in effect has left a $70-90 Billion void in buyers for new securities.
  • In a nutshell that turned the MBS market upside down and what we are seeing now is the market trying to figure out where the new “normal” should be in rates and the price they pay for those associated rates.

What does that mean for our rates to consumers? In short, chaos.  While the market attempts to correct to the “new normal” there will be a period of time where everyone is scrambling to not be the last person holding onto MBS paper that is declining in value daily.  That in-turn leads to note rates going up but the associated price (yield) not matching up as would be expected.  As a result, the rates not only spike in yield, but they come with corresponding higher prices (ie. “points”).

The market will eventually normalize, but currently the mortgage market is providing no appetite for note rates higher than what is already published.  Example: if we go to 5.125% note rate on a particular file there is No to Little Additional value paid by MBS buyers right now for say a 5.50% to 5.75% rate.  The reason is that as quickly as the market went up there is a possibility that it could snap back the other direction just as quickly. While the expectation amongst economists that follow our market is that this situation is unlikely to occur the possibility that it could means that these higher note rates pose very high risks for investors as you could have an entire pipeline locked at a higher rate today and if the market snaps the other way tomorrow that whole pool of loans is in jeopardy because borrowers would walk down the street to a different lender to lock in at a lower rate.  That means that the “hedge”  (consider it insurance) that was purchased to ensure those loans would not lose money are all out the window which is extremely expensive.  Again, in time, this will all settle and get back to normal.  When it does, there will be higher rates offered that will have lower costs, and even credits back to borrowers.

Eventually, the higher rates will serve their intended purposes. The higher rates will choke off inflation and help bring balance to the housing market which will help many first time home buyers in the long run.  For instance, instead of competing against 20-40 other offers on the same house, the competition might be reduced to a more normal 4-8 offers.  The only real questions are: how long will that take?  And, what will be the final cost in terms of the ceiling on mortgage rates normalizing?
Together Naomi and I have over 60 years of combined experience to assist you. Please let us know how we may help you, or your friends, family or co-workers this year. We <3 Referrals!