Mortgage rates are determined by the supply and demand for mortgage bonds in the bond market. When you get a mortgage in the US, your mortgage company is getting the money from Fannie Mae, Freddie Mac or other “securitizers”. These “securitizers” get their money by issuing bonds to bond market investors. These bonds are called “mortgage bonds” or “mortgage-backed securities”. Therefore, the mortgage rate you pay is really determined by the supply and demand for mortgage bonds in the bond market. As you can see from the chart, the Fed owned zero ($0) mortgage bonds prior to 2008. Once the financial crisis happened, the Fed decided to start buying mortgage bonds in order to drive interest rates down and stimulate the economy. Currently, the Fed owns a whopping $1.6 TRILLION in mortgage bonds!
- In March 2020, in response to market turmoil related to coronavirus fears, the Fed announced it would be ramping up its purchase of mortgage bonds once again. This should have the impact of keeping mortgage rates low.
Time will tell how the market responds to this. In fact, the Fed announced the following actions to stabilize the financial markets:
- $700 billion in bond purchases:
The Fed will purchase at least $500 billion of US Treasuries and $200 billion of mortgage bonds over the next few months. Also, when homeowners refinance their mortgages or pay down principal causing mortgage bonds to pay off early, the Fed will reinvest the principal repayments back into the market. This should help keep mortgage rates and other borrowing costs lower in the economy.
- Short-term rates down to 0%: The Fed lowered the Fed Funds target rate to a range of 0% – 0.25%. This will cause banks to lower their “Prime” rate to 3% or 3.25% (Prime is 3% above the Fed Funds Rate). This will cause rates to go down on home equity lines of credit, business loans, credit cards and other debt tied to the Prime rate.
- “Easy Money” Policy: The Fed took several other actions to provide liquidity to the financial system such as lowering its bank reserve requirement to 0%. This means that banks are encouraged to loan out their excess funds to consumers and businesses as opposed to keeping their excess funds in reserve. This should make it easier for consumers and businesses to get loans during this difficult time for the economy.
Please contact me for further details or for real-time analysis of how mortgage bonds are trading today.
Source: CMPS Institute
Carrero Mortgage Advisors, LLC
Miramar, Florida 33025
Corporate NMLS: 1734670