Mortgages October 27, 2022

So why are mortgage rates increasing?

Most people think it’s the FED rate hikes that control the mortgage rates.  It does not.  It controls the Fed Funds rate, which directly affects US Treasury notes .   What affects the mortgage rates are US Treasury notes.  Treasury bonds are one of the world’s safest investments.  If investors find the yields attractive and safe, the yields on the bonds’ notes go down, pushing mortgage rates down, as well.

The secondary mortgage market activity also affects rates for mortgages.  This is less discussed and understood.   It is made up of  the Federal Government (Fannie Mae, Freddie Mac, or Ginnie Mae), private equities firms, REITs and other private banks/lenders.  Think of it like this…a bank gives you a mortgage loan from their supply of cash.  They need to replenish that cash at the secondary mortgage market, exchanging good loans for more cash.  That loan is referred to as a “mortgage backed security”.

If the majority of those securities are bought by the government entities, it is part of the Quantitative Easing (QE) program.  If the government reduces the amount of purchases of mortgage backed securities, then mortgage lenders have to find other buyers for the loans they are originating.  This is part of Quantitative Tightening (QT), which is happening now in the latter part of 2022.   Those other buyers, investors per se, are going to be looking for better returns (interest rates) than the Federal Government is willing to accept. Investors at the end of the day are looking for returns on their investments that will be better in the short term than in the long run depending on what their expectations for the future are.

Hope this helps.  Call me to talk about it further.