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20 May 2010

What’s Happening with Rates?

I spend a lot of time with our franchisees discussing both macro and micro economic trends in various parts around our great country.  During a recent conversation regarding home affordability, a sales associate asked what causes mortgage rates to change so quickly.  This particular sales associate is newer to the business and apparently, just had an irate buyer who ‘floated their lock’ and ‘caught themselves short’ when forced to lock in time for their closing.  Her question, and the associated conversation, inspired me to share what drives/influences mortgage rates.

You may remember that when it comes to bonds, prices and yields/rates of return move opposite one another.  When bond prices rise, their associated yields fall; and when bond prices fall, their associated yields rise.  Keeping this inverse relationship between prices and yields in your mind helps to explain why mortgage rates (based upon the Mortgage Backed Securities market) can change rapidly.  So, let’s look at a typical market change:  the US Stock Market falls (for example).

When the US Stock Market falls, what typically happens is that investors, who are nervous about owning risky stocks, allocate their money into much less risky US Treasuries that provide them the security and some degree of returns that they are comfortable with.  As US Treasuries become more popular, their price increases (remember the old supply and demand curve?)- thereby making their yield/rate of return lower (inverse relationship).  The Mortgage Backed Security market trades closely with the US Treasury market.  So, when MBS prices are up (trending with Treasuries,) the mortgage rates that banks can offer qualified customers can go down.

As with all other debt/bond investments, the inverse is also true, when the US Stock Market rally’s and investors move more money into the stock market, and away from investments like US Treasuries and Mortgage Backed Securities, prices of these type of investments go down (i.e. weaker demand).  The lower prices in the MBS market causes banks/lenders to increase (raise) consumer mortgage rates.

To demonstrate how rapidly prices and yields/rates can change, just consider the impact the European market had on our US market last week.

Monday: As investor sentiment changed from the past weeks European Union announcement to address the debt problems of certain EU members, the stock market rally forced US Treasury Yields higher and MBS yields higher as well (meaning higher consumer mortgage rates).

Tuesday: Stocks opened lower and then gained ground as the day progressed.  The net effect is that mortgage rates stayed predominantly the same as they ended on Monday.

Wednesday: The US Treasury Department auction of $24 billion of 10 year notes came and went as expected – a view that US debt remained healthy.  Since everything happened as expected, rates once again remained fairly consistent.

Thursday: Again, very little movement with mortgage rates.  The Treasury sold $16 billion of the 30 year bonds – just as was expected.

Friday: The US Stock market sold off quickly this day.  The reasons for the sell off were many, but the net effect was a large number of investors who moved out of the stock market and into the US Treasuries.  This increased demand increased prices for Treasuries and Mortgage Backed Securities to new highs for the year.  This price increase allowed banks and lenders to provide better mortgage rates – a few at 4.75%.  So, in the time frame of 5 business days, there were some very big swings in consumer mortgage rates.

There you have it – a quick review of mortgage rate drivers.  Mind you, I do not believe that our sales associates should provide any direction to their customers on decisions regarding mortgage rates; that should be left to the loan officer everyone feels is the best qualified.  However, I do believe that it’s important for our sales associates to understand the drivers of mortgage rates.  Today’s consumer is very desirous that our sales associates can answer the questions they have regarding their new home purchase.  And while you don’t want to be quoting rates, being in the position to understand the direction of mortgage rates clearly differentiates you from the rest of the crowd.

If you are interested in staying abreast of the direction of rates on a daily basis, I would recommend visiting the Mortgage News Daily website.  It’s chock full of great information and helped me verify some of the information you read above.

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