Mortgage Rates

data1MBS.  It stands for mortgage backed securities and the market for MBSs determine mortgage interest rates as seen by the consumer.  Mortgages are purchased from banks, mortgage companies or other originators and pooled for purchase by a governmental or private entity.  These entities then securitize the pools by issuing claims on the principle and interest payments of those loans in the pools.  Most MBSs are issued by a Governmental Agency like Ginnie Mae or GSEs (government sponsored enterprises) that include Fannie Mae and Freddie Mac.  MBSs come in a variety of structures and levels of complexity but the important fact is that the market for MBSs is what determines mortgage interest rates (not the 10 year treasury).  Originators of mortgages (lenders) sell to aggregators who sell to investors.  The market determines the price investors will pay aggregators and in turn flows down and determines what rates originators charge borrowers. 

The chain of purchase has been dramatically altered in the last year.   There are fewer players at each level in the process, most notably the top where large financial services firms and others that acted as investors have failed and/or been swallowed.  The remaining players appetite for risk has been properly corrected.  MBSs are bonds that typically have an inverse relationship with the stock market.  When the stock market rises, money is flowing from the relative safety of bonds and into securities.  As demand for bonds drops the price they can charge goes down and mortgage interest rates rise (lower price means they charge a higher rate).  Likewise, when money leaves stocks demand for bonds rises.  Higher bond demand leads to rising bonds prices and mortgage rates fall.  This relationship is why mortgage rates often follow the rise and fall of stock market.

Make sure you use lenders that understand this relationship AND have the ability to follow MBS pricing.  Those professionals are in the best position to stay ahead of the market.  If you ask and are told a lender follows the 10 year treasury (used to be widely accepted), run for the hills.

Questions?  Email me at michael.pfeffer@pncmortgage.com.

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