Volatility and Mortgage Rates ↑

As a follow up to my email from last week, many of our clients are asking, "Why are mortgage rates ticking up and not trending lower considering the bond/treasury market is at its lowest point ever?" Here's a brief explanation but please feel free to call or email us if you like to discuss the market on a deeper level.

Mortgage backed securities (MBS): From an investor perspective, mortgages offer a higher return for more risk. Investors purchase securities backed by the value of home loans, these are called Mortgage-Backed-Securities. When yields on Treasury bonds rise, banks charge higher interest rates for mortgages and in turn, investors in mortgage-backed securities demand higher rates to compensate for the greater risk. Since inception, the mortgage industry has never experienced a dislocation of markets like what is being experienced right now and we are seeing a severe decoupling of that relationship.

Bond yields are going down but the pricing of mortgage backed securities is going up. It's not logical and completely contrary to what we are used to seeing and that is why we have entered unchartered territory. Some possible reasons for the market reaction might be hedging costs, operational capacity, margins, overhead and early payoffs etc. Also, most lenders were caught off guard and were not operationally prepared for the huge influx of refinance volume, so unprepared lenders might be further tightening rates/pricing to curb the inflow of loans.

What should you do if you are considering or are in the process refinancing your mortgage? Most experts believe as things settle down over the next few weeks, we should see a return to some normalcy in terms of the MBS/Bond market relationship and mortgage rates should improve in favor of the consumer.

We are advising our clients to get a complete loan application in to us and within days we will have it underwritten and then wait to lock at the most opportune time. Please call or email us if you have questions, happy educate and guide you through the volatility.