The markets have been all over the place in the past few weeks. Doom and gloom predictions have been rampant, the critical Wall Street siren's have been calling for a drop in rates for the past few weeks. The real problem has been the tightening credit strings of most banks. The margin calls, the high foreclosure rates, and the flight of capital into commodities has pushed Banks to the brink. Now the Federal Reserve is attempting to rescue the banks, without further destabilizing the dollar and causing further damage to the economy.
So how does this break down for the average Joe like myself who just needs to know where rates are headed. We'll the first thing to remember is that when the Federal Reserve adjusts rates, that these rates only affect the cost of banks doing business with one another. They really have little bearing on the actual index's that determine mortgage rates. Mortgage rates are determined by Mortgage Backed Securities, or the abbreviated term, MBS. These MBS index is the best determinate of current and future rates, but the MBS historically follows the 10 year treasury yield. So if the 10 year treasury yield drops, then the MBS follows suit and mortgage banks drop their rates. The problem is lately the MBS's have been abandoned by investors. The fear is that these banks will not be able to meet the investor expectations on their investments, and therefore these normally conservative investors are finding government bonds and other protected places to put their money. So even when the treasury yield falls, the MBS's actually trade higher, due to the fact they need to find buyers of their securities whom are willing to invest at a higher rate despite the fact that it's a risk investment.
Now back to todays move by Bernake. The federal reserve didn't lower rates today, they just threw the banks a life line. They basically gave the banks 200 Billion dollars, though it's a little more complicated then that, but it means that the banks will have access to much needed cash. The question is if this will attract more investors to MBS's in general, or will the banks react conservatively. Therefore the big billion dollar question is how low will the Federal Reserve lower rates in their next meeting. The banks hope it's a full percentage point, but now Wall Street is thinking they'll probably only reduce rates by a 1/2 point or 3/4 a point.
Therefore, it's still up in the air how effective this 200 billion dollar injection will be in regards to the credit markets. So far we've actually seen a .25 point bump in pricing with most of our wholesale banks, and though the bond is skyrocketing due to the DOW's nice jump, there haven't been any other increases, which makes me believe the MBS market is slowly recovering. The real question of how far rates will drop will be settled when the Federal Reserve meets this month.
Finally, if your looking for a home loan right now, and your worried about rates. The best strategy would be to find a mortgage professional like myself who understands what is going on in the market, and then stay in regular contact with them over the next few weeks. Your mortgage professional is constantly updated towards any changes in the market, and should know when it's appropriate to lock your rate or float.
Great Article to read this morning
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