Interest rates are subject to market pressures, not magic
Have you ever wondered how interest rate work? How is it that financial institutions across the board offer pretty much the same rates, with so little variation? Are they all in cahoots?
They’re not exactly in cahoots. In fact, the lenders don’t control very much themselves. The reason interest rates are so widely the same is that all of that money the lenders have access to comes from Wall Street.
Secondary mortgage markets
After you close on your loan, your original lender may sell it to a mortgage aggregator. An aggregator is a middleman who buys up mortgages from lenders, packages them all together as mortgage-backed securities (MBS) and sells them in the aggregate. The markets in which those are sold are called secondary mortgage markets.
The actors in those markets are private investors and government-backed institutions like Fannie Mae, Freddie Mac, Ginnie Mae, and Federal Home Bank Loans. The sole purpose of those government agencies is to provide liquidity for mortgage bankers and other lenders.
We all probably own mortgage-backed securities in our 401k plans, other retirement accounts, and different investment vehicles. Most people just don’t know it. So as the economy fluctuates up and down, mortgage interest rates fluctuate up and down.
It’s the same as the stock market. Mortgage-backed securities are deeply affected by inflation and presumed inflationary pressures, so market movements and the actions of the Federal Reserve greatly impact mortgage rates.
Mortgage rates move at least once a day. And in a volatile market, they can move every hour. I can remember when it has been so volatile that they shut down the “lock in” desks and we weren’t able to lock in any interest rates.
Why do secondary markets exist?
Almost all mortgage loans will be transferred and sold in some shape, form, or fashion. Without it, we might find ourselves like we did back in the 1970s and ’80s with the savings and loan (S&L) crisis.
In the late 1970s when inflation and interest rates both skyrocketed, Savings & Loans, which are a huge portion of the mortgage industry, ended up lending money at a lower rate than they were borrowing it. This was due to government caps put on the interest rates for the mortgages offered by the S&Ls. Hundreds of S&Ls went insolvent despite government attempts at correction.
In short, the secondary markets offer protection to lenders from volatile interest rates and other economic factors.
Over the last several years the Federal Reserve has been artificially keeping mortgage rates lower by purchasing mortgage-backed securities. This is called “quantitative easing,” and it follows the simple rule of supply and demand. The Fed is increasing the amount of money in the markets — the liquidity — which encourages more investment and lending by the banks.
But more recently the Fed has slowly stopped purchasing those securities. That’s why we’ve seen mortgage rates gradually increase over the last 12 to 24 months. If the Fed doesn’t purchase them again, interest rates aren’t going to get any lower unless something impacts the economy.
Bonds and Treasuries
Bonds have a dramatic effect on mortgage rates, and even more so the 10-year Treasury. That’s because bonds, Treasuries, and mortgage-backed securities compete for the same types of investors, who want relatively low risk with a stable return. The typical mortgage term is for 30 years, so mortgage-backed securities are considered a stable investment.
Don’t wait for interest rates to drop
A crashing economy or a recession does not necessarily guarantee lower interest rates. War and other national events can affect interest rates. All sorts of economic activities affect mortgage rates, just like they affect the stock market.
The point to take away from all of this is that you should not wait to get your home loan. If you’re waiting for something magical to happen with interest rates, you could be waiting a really long time.
For more about interest rates, lenders, or anything related to mortgage financing, call us at (205) 986–4220, get online, or find us on social media. We’re here to help you out.
— Ben Chenault,
Certified Mortgage Planner
MortgageBanc / Fairway Nmls# 2289
Fairway Independent Mortgage Corporation is not a credit counseling agency and will not provide credit advice. Please consult a professional regarding your specific credit situation.
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