movements shape the mortgage playing field
So bonds are down, the Dow is up and the yen
carry trade went sour for an investor up North. Chances are these
headlines blur into meaningless babble for most mortgage hunters.
But it's such market movements that affect the price of home loans
Take the mortgage-backed security. It's an investment
made up of several loans that are bundled together and yield roughly
0.50 percent less than a borrower's interest rate. A 7 percent mortgage
held by a bank customer, for example, yields about 6.50 percent
to a mutual fund or other investor.
Rise and fall
The yields on those mortgage-backed securities generally rise and
fall along with yields on U.S. Treasury bills, notes and bonds because
those government securities reflect the overall direction of interest
rates. Thirty-year fixed mortgage rates, for instance, usually move
in tandem with the yield on the 10-year Treasury Note because the
mortgages often expire in about the same number of years it takes
the note to mature. Few 30-year mortgages stay on the books for
30 years because people refinance, move or otherwise retire the
Many events can help send Treasury yields lower,
but tensions that accompany signs of slower economic growth typically
have the greatest impact. These signs come from government and private
sector research reports issued almost daily. They catalog things
such as new home construction rates, consumer spending and output
from the country's factories and mines.
Other things that can spur lower yields include a Federal Reserve
rate cut (two have kicked in during the last month) and global market
turmoil. Recent international upheaval has driven investors to snap
up safe investments, including Treasuries, which sent Treasury yields
While mortgage rates traditionally move in tandem
with Treasury yields, when yields decline sharply over a short period
of time, mortgages generally don't drop at the same pace because
of what happens to mortgage-backed securities.
As soon as mortgage rates start to slide, people
begin to refinance. Every time a loan is paid off early, the mortgage-backed
security of which it is a part slips in value. Suddenly the investor
needs a new investment, either another mortgage-backed security
or, perhaps, something safer, like a Treasury note.
If the investor opts for another mortgage-backed
security, he will want to be compensated for the newly increased
risk level. As a result, he demands a higher yield, pressuring rates
upward on the mortgages that will back the new security.
Investors who leave the mortgage-backed security
market for the higher ground of Treasury notes reduce demand for
mortgage-backed securities, and reduce competition. That further
drives up mortgage rates.
and other ills
Inflation, of course, remains the hidden enemy of all kinds of debt
securities because it drives rates up across the board. It generally
is born of excessive economic growth, or an overabundance of money
in circulation. The United States has escaped inflation for some
time now because the various problems in Asia, Russia, Latin America
and elsewhere have helped check the country's growth. But most adults
can remember the effects of inflation on mortgages: Just consider
that mortgage rates were in the teens during the mid-1980s.
Supply and demand also pull and tug on the price
of a mortgage. Experts say people stand to save a bundle if they're
buying a property in an area where a lot of lenders compete for
a little business. That especially holds true when there's a slowdown
in the housing market because companies accustomed to higher loan
volumes want to keep things busy by cutting deals.