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How To Explain The Huge Drop in Mortgage Rates This Week

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Mortgage rates These days, it’s present throughout the map, both in terms of movement and variability between lenders. It’s not uncommon for certain borrowers to see rates 0.5 points lower than last week, well below mid-June highs.

this is Exceptionally Fast drop! Perhaps even more interesting (and unusual) is Mortgage rates It is declining faster than the US Treasury yield. The opposite is usually the case when investors first flock to the most basic and risk-free bonds.

So why does a mortgage win the race this time? There are several factors, but the most notable is the structure of the underlying mortgage market.

A quick disclaimer / warning before moving on: There really isn’t a great way to talk about what’s going on without making things a little esoteric. If it’s all a little confusing, it’s normal. The following six steps will block the most esoteric, but you need to do it to understand the following treatises.

step 1: Mortgage rates Mainly based Mortgage mortgage securities Or MBS. When a lender makes a mortgage, those mortgages are “converted” to MBS and sold to investors who want to earn interest on the mortgage.

Step 2: MBS has coupons. This is the official rate paid by the bond. Other bonds, such as 10-year government bonds, also have coupons.

Step 3: MBS has a price. The same is true for the 10-year Treasury memo. This is the price an investor pays to own $ 100 of the bond. Prices can be higher or lower than $ 100. If a fictitious coupon pays more than $ 100 for a 4% bond, you’ll technically get a rate of return of less than 4% because you paid in advance. Coupons are set on stones on a regular basis and the bond market moves by changing the price paid for the coupon. The combination of price and coupon gives investors an idea of ​​the actual yield associated with the bond. So when you see the 10-year yield moving around every day, the coupon doesn’t change. Just the price.

Step 4: Unlike the Treasury, which changes coupons only once a quarter, MBS coupons are offered in half-point increments (ie 4.0, 4.5, 5.0, etc.) and investors can buy and sell at any time.

Step 5: In other words, investors can choose which MBS to buy. Investor demand for a particular coupon can fluctuate for a variety of reasons. However, in general, investors prefer to buy the lowest possible MBS coupon if they think the broader rate market is full or the rates continue to decline.

Step 6: Mortgage lenders can choose when choosing an MBS coupon for placing recently launched loans. There are boundaries here.Certain MBS coupons are limited to Mortgage rates That’s 0.25% to 1.125% above that coupon. For example, a 4.0 coupon MBS is like a bucket where you can only hold a mortgage with a rate of 4.25% to 5.125%.

Now that you have a complete internalization and understanding of the structure of the mortgage market, you’re ready to go. These “choices” regarding which MBS coupon to buy / sell make it easier to move the price of one coupon than adjacent coupons. In the weeks following the long-term highs in interest rates, investor demand shifts significantly in favor of the “next lowest coupon” when the market may feel a new trend towards lower interest rates.

The “next lowest coupon” is not always a viable option. For example, last week when interest rates were in the mid-to-first half of the fifth generation, offering a fixed 30-year interest rate of 5.125% was too big a drop to entertain most mortgage lenders (5.125% was 4.0). Remember that it’s a cutoff). MBS coupon).

On the other hand, the demand for these 4.0 coupons is steadily increasing compared to the 4.5 coupons. 4.0 coupons are highly sought after, and a 5.125% mortgage interest rate will bring more money to a mortgage lender than the 5.25% interest rate if you convert your mortgage to an MBS and sell it. Many lenders offer a 5.125% rate on very similar terms to the 5.375% rate.

That may not sound like a big deal, but at a more stable time, a full “discount point” (1 of the loan balance) to “buy” a rate of 0.25% (the difference between 5.375 and 5.375). %) Please consider that it may take. 5.125%) On the other hand, it costs about 1/10 point today.

Conclusion: Because the distance between adjacent MBS coupons has become so small, bond market improvements have not taken as much as it normally takes lenders to jump down to the rates associated with lower coupons.

Note: In some cases, the advertised rates may actually include some prepaid points. This is because it can take very few points to get the rate into the next lowest MBS coupon bucket. In other words, the points are currently worth their spending. That doesn’t mean it’s the best option (after all, if interest rates continue to fall, you’ll want to not pay prepaid points)-coordinate mortgage interest rate headlines and major changes in the index. It’s just a phenomenon that helps.

So where are the prices today? It really depends on the lender who is quoting. Some may still be legally quoting a high 5 rate. In such cases, we hope there are no additional “points”. Other lenders are certainly quoting 5.125%, and some have already returned to the high of 4. In general, the lower the quote, the more likely it is that discount points will be included.

Last but not least, it should be noted that Thursday itself was a huge day for interest rate fluctuations due to the reaction of the bond market to the negative GDP numbers announced this morning.

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