Blog Cont.
Posted: March 27, 2009
Why Aren't Mortgage
Rates Lower?
Author: Chris Reese
Many people today are
watching mortgage rates like a hawk. They are
hearing news reports that due to the effort of
the government, rates should be 4% lower. I
watched my local news station give a report on
exactly that. They went on and on about how low
rates will be. Then once everyone had tuned out
right before they went to commercial, the reporter
actually made a qualified statement.
He basically
said that that the Government’s purchase plan of
mortgage backed securities “should help to keep
rates where they are, and they might possibly go
lower.” Now that is the truth. Rates will remain
pretty much where they are. We will see little dips
in rates, and little increases too, but they will
constantly come back to where they have been for the
last month or so, which definitely isn’t 4% or lower.
Part of understanding why rates aren’t 4% or lower is
to understand how banks and mortgage lenders set their
rates. There is a highly liquid market for Mortgage
Backed Securities (MBS) just like the stock market.
These MBS pools change value throughout the day based
on their supply and demand. These are typically 30
year coupon bonds that are tied to mortgage rates.
In other words, when investors by MBS, they are
providing the funds that will be loaned out as
mortgages. The rates that are offered on those loans
are based on the prices that they sold the underlying
MBS for. When the prices of MBS go up enough, lenders
actually lower their rates. When the prices of MBS go
down, mortgage lenders and banks will raise their rates.
Another way to say this is that mortgage rates and the
price of MBS have an inverse relationship.
So what
changes the price of MBS? Supply and demand does.
What affects the supply and demand? Many things do
such as the performance of the stock market, but
for the purpose of this article we are focusing
on the government’s purchase plan. Because the
government is buying massive amounts of MBS, the
supply is very low, and the demand is high. This
causes the price to increase and in turn the mortgage
rates to decrease.
Understanding that the Government
is buying all of the MBS which keeps the supply low
and demand high, why aren’t the rates at 4% then?
MBS are sold at different levels. There is the 5.5%
Fannie Mae coupon bond which is usually tied to
mortgages with rates at a full 1% higher than the
actual coupon bond.
The mortgage rates associated
with the 5.5% coupon bond will be around 6.5% or
more. Now the news stations heard that banks and
lenders would start to price from the 4.00% and
4.5% Fannie Mae Coupon Bonds. Mortgage rates tied
to these bonds will be around 5% or more. Based on
that, you can see that rates are where they are
supposed to be.
Author: Chris Reese
The above article was posted on Huliq.Com - March
27, 2009
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