August 15, 2013 4:45 PM
Wow, just as I’m putting this together, International Investors dumped $41 Billion in Treasuries today, the MOST ever, Bonds, a ton of Mortgage Bonds and US Stocks… Should be interesting to look at the rates tomorrow!
We (and the sage Gurus) all know why and what caused Interest rates to change, AFTER they’ve changed but who can predict what they’ll do in the future? I’m reminded of this from last year, when the Fed Chairman Ben Bernanke spoke in April 2012, there was very little coverage in the media, he said they’d double the 10yr rate by the end of 2013. See the table on the post below, to see, we’re almost there now!
There are many factors “linked” to this most important index: Inflation, Unemployment rate, Libor rate, NonFarm Payroll, Whose up for election/reelection, Who’ll be reappointed/appointed, it almost seems arbitrary and cryptic. Then there’s the “4 corners of the Box”* which YOU as an Applicant determine.
Interest rates on Fixed-Rate mortgages, according to Kimberly Amadeo, are affected by Treasury Yields. This is because Investors, looking for fixed, guaranteed returns on their money shop for Treasury notes, CDs, Money market funds, Mortgages or Corporate bonds. T notes are considered safe because the US government guarantees them. Mortgages are not as safe so correspondingly the return must be higher.
Polyana da Costa makes an important distinction, While Lenders set the qualifications for Applicants*, the actual rates are set on the secondary market where they’re bought and sold. Fannie Mae and Freddie Mac will bundle the mortgages and either sell them or keep them in their portfolios.
Jane McGrath Breaks it down.
A. Lenders/Banks sell off your mortgage to investors or aggregators. Very few, despite what they say about being Portfolio (keeping your mortgage “in-house”) Lenders, will actually keep your loan in house. They’d run out of funds to Loan, fast! Most of those Lenders and Banks will of course continue to “service” your loan.
B. The Aggregator will bundle your loan with others of the same ratings into MBS (Mortgage Backed Securities).
C. The mortgage-backed securities will be divided into “tranches” (shares) and sold to other Investors.
Those investors buying the tranches receive your mortgage payments which are the Returns on their Investments. Middlemen have to fine tune these rates between attracting the homebuyers and investors. Obviously Homebuyers are attracted to Lower Mortgage rates but Investors must receive higher Mortgage rates to attract their capital.
Personally, I believe FIRST the largest lenders look at the Trates (guaranteed by the US Fed) and know they’ll need to pay a higher yield for their higher risk (not guaranteed by the US Fed). THEN they look at their business, Are Applications up? Yes. Tweek rates upward for less Applications. No. Tweek them down for more Applications. Disagree? What do you think causes these changes?
*”4 Corners of the Box” is an illustration to help you remember what determines YOUR rate once the Mortgage rate field is set. Now automated, it takes into account:
1. Your FICO (Fair Isaac Corporation that analyzes your credit to determine a score). 2. Your DTI (Debt To Income) ratios. 3. Your Cash Reserves in months (Cash/PITI (Principal, Interest, RE Tax, Insurance)). 4. LTV (Loan to Value of the Property)
Armed with this information can you get a better Mortgage rate or just understand it better?
Mike Hurney, Director www.MassRealEstate.net can be reached at [email protected] or 781-639-8616