Oct
25
Welcome To My Blog
October 25, 2006 | Leave a Comment
Welcome to the MortgageSecretsBook.com blog. The mortgage business changes so fast that I knew I’d never be able to get ALL the latest information into the book so I decided to start this blog. This is where I’ll post challenging loan scenarios and investment financing issues as I encounter them. This is real time and real information. All free for you! Be sure to book mark this page and visit often because it’ll be updated daily or more! To your success!Susan
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Oct
25
How Do You Know If Rates Are Going Up?
October 25, 2006 | Leave a Comment
As a mortgage professional, this is something I get asked ALL the time. The answer is as long as complicated as you want it to be but the short answer is to watch the 10 year treasury bond. Here’s a great explanation of why from HSH Associates:
Here’s an oversimplification of the relationships of mortgages to Treasuries:
As we mentioned, intermediate term bonds and long-term mortgages (more properly, Mortgage-Backed Securities, or MBS) compete for the same fixed-income investor dollar. Treasury issues are 100% guaranteed to be repaid, but mortgages are not; therefore mortgages carry more risk of default or early repayment, which could potentially disturb the return on the investment. Therefore, mortgage rates must be priced higher to compensate for that risk.
But how much higher are mortgages priced? In the current market, the average “spread” or markup above the 100% secured Treasury is about 170 basis points, or 1.7%. That markup — the spread relationship — widens and contracts with a range of market conditions, investor appetites and supply of available product — as well as the presence of competing investment opportunities, like corporate bonds or domestic (or foreign) equity markets. Professional money managers, and investment and retirement funds constantly strive to obtain high-yielding instruments at a given level of risk. Money shuffles from place to place in search of this — from bond to bond, and market to market.
As we mentioned, the relationship isn’t a fixed one, but one that changes with market conditions. Recently, for example, ten-year Treasuries rose from a low of 4.22% to 5.01% over a three-week period — about 80 basis points, altogether. At the same time, the average 30-year fixed mortgage rate rose from about 6.59% to 7.21%, a rise of only 62 basis points. Over time, there are any number of examples where Treasury yields have risen faster than mortgage rates, as well as times when mortgage rates rose faster than Treasury yields. Consequently, the spread between the two expands and narrows appreciably, which is why you can’t simply take the ten-year yield, add 1.7% to it and know exactly what today’s rate is.
And there you have it!
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