Bond Market Threatens Low Mortgage Rates: Lock In While You Can!
Mortgage-Backed Securities selloff triggers potential interest rate hike.
Over the past several years, mortgage interest rates have continued to fall to new historic lows. Even as of this posting, they are still hovering in the high 3% range. Not bad, considering there was once a time a few decades back when homeowners were lucky to obtain a mortgage loan with an interest rate in the low teens!
These historically low mortgage interest rates, along with a recovering economy, has helped spur a sizable comeback in the real estate market; which was nearly left hanging by a thread as a result of the “Great Recession” of 2008. The Santa Clarita Valley has seen an influx of qualified home buyers who have taken advantage of low interest rates and loan programs, and we’ve seen multiple offers come in on many properties for sale; many selling above list price.
What is a Mortgage-Backed Security?
A Mortgage-Backed Security (MBS) works similar to how a stock option might work, in that it is offered as an investment strategy that may provide the investor with a net gain return. In a nutshell, an MBS is a bundled share (or shares) of a home loan sold to investors.
When a mortgage lender provides a home buyer with a loan, the borrower makes payments with interest to the mortgage lender. Pretty simple, right? However, the lender can then package the borrower’s loan, along with several others, and offer them as a Mortgage-Backed Security to a larger bank or investment firm. Shares are issued in the form of “tranches” (Which is actually a French word meaning “slices”) to investors who collect dividends on the value of the loan based on many factors including the rise in property values.
So how are Mortgage-Backed Securities making interest rates rise?
This is where it gets a bit tricky, but it has to do with the Federal Government’s program of Quantitative Easing, or QE3. This is something a lot of homeowners gloss over as they’re listening to the news over dinner, but in effect, QE3 is a stimulus program that has actually helped stimulate mortgage-backed securities and help keep interest rates low. However, these words from Federal Reserve Chairman Ben Bernanke on Wednesday triggered a selloff of MBS within the next two days:
The Fed will continue the stimulus “until the outlook for the labor market (has) improved substantially. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.
Many investors took Bernanke’s words to mean that the QE3 stimulus may be resized or eliminated altogether, and so the selloff began; causing an 83 basis point drop in mortgage-backed securities from the previous week.
This in turn caused interest rates to fluctuate upward. That being said, interest rates are still hovering in the high 3% range.
If you’re on the fence about buying a house, now is the time!
Locking your interest rate as soon as possible insures you’ll have the opportunity to purchase a house at what are still considered incredibly low interest rates. Contact us today for a no obligation consultation.
Elgin & Pilar Walker
Keller Williams VIP Properties
25124 Springfield Court Suite 100
Valencia CA 91355
Office: (661) 290-3781
Mobile: (661) 347-6248