People ask me “when will rates go down?” To most I say “they’re only going to increase from here on”. When they ask “why?” I tell them it’s because of the Gov’ts purchase of Mortgage Backed Securities. They look at me funny… to which I then tell them how it works.
Every time Fannie Mae and Freddie Mac “buy” a loan they have to sell it. Why? They’re not banks and don’t have unlimited money. Who do they sell their loans to? Insurance companies, pension funds, mutual funds, foreign countries… you and me.
But they then ask “How do they buy them?” I tell them that they package them up in nice bundles and sell them as securities on Wall Street for they shall be called “Mortgage Backed Securities” or MBS. So far so good.
In the hay-days of 2003-2007, entities like I mentioned above, bought them like hotcakes. Just like stocks, when demand increases so does price. However with Bonds, an increasing price results in reduced yields. Hence the greater the demand for MBS, the lower mortgage interest rates are.
Assuming they’re still with me, they continue “So why are rates going to increase?” to which I ask “haven’t you read the papers? Who wants to buy Mortgages these days? Their ‘dirty’, people are being foreclosed upon, home prices are decreasing! Who in the heck wants to be a bank these days?” Demand dropped and rates increased. Just a year ago, rates were in the 6.50% range. Not bad, but the market ground to a halt. Remember?
They then ask “so how come rates are so low now?” to which I tell them to thank Uncle Sam. Now they’re really confused! I continue to tell them that the US Government has been buying BILLIONS of dollars in MBS this year. In fact, they are on a mission to buy up to $1.25 TRILLION dollars in MBS this year. So far they’ve purchase approx $850 Billion. THAT’S who’s buying mortgages this year which is what’s keeping prices up and mortgage rates LOW.
“WOW!” they say, “That’s Great! So why are rate going to go up?”
Now the clincher -> Because the Feds announced that they are slowing their buying and get out of the MBS business. Hopefully they won’t get out over night and the private sector will step up and buy. But make NO mistake – MORTGAGE RATES ARE GOING TO RISE STARTING N-O-W!
Need more info? Call Todd Abelson and Tyler Ford at Sunstreet Mortgage in Tucson, Arizona for all your mortgage needs or visit us at www.TucsonMortgages.com
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