Mortgage Rates On A Roller Coaster!! Why This Is Happening??

What a crazy week.   Good news with the FHA loan increases.   Bad news in the mortgage markets.

For those of us in the mortgage business a long time, it is very challenging to describe what we are going through.  

Last Thursday rates were near a 2008 high.   On Friday they shot so low they were near a year low.  By Monday, it was over.  And by this week's end,  they are all over the place.

Why is all of this craziness happening?   It used to be very easy to predict what mortgage rates would do in a day.  You would watch the movement of the 10-year Treasury bond.  If the yield fell, rates were probably going down.  If it went up, rates were probably going up.

Today, it's not a consistent barometer.  Not even close.

Today, the mortgage market is $1 trillion, with a "T", short in capital.   

This is the way today's mortgage market works.  Investors, like hedge funds and mortgage real estate investment trusts, buy mortgage securities.  Bulk packages of loans.    They finance a lot of these purchases with borrowed money.   

Today there is little confidence in these home loans, because of the foreclosure mess, that back these mortgage securities.

Because they are worried about these homes going into foreclosure, the banks that finance most of these mortgage investments for these investors have started to pull back and they are imposing margin calls. 

They are demanding more cash or more collateral to back their loans from these investors.

This has made it very difficult on these investors.   So some highly leveraged mortgage investors have to sell assets to meet margin calls.  

When you are forced to sell anything in life, it pushes the prices lower.  This then sparks more margin calls, which then means more selling and more lower prices. 

At the end, when debts fall, yields rise on the mortgage backed-securities, and then you have higher mortgage rates.

We are at a 23 year high on the difference in the correlation between mortgage securities and the Treasury bond.  And, as I said above, that used to be a pretty good barometer.

If you didn't follow all that financial mumbo-jumbo, don't worry about it.    The best lesson today is to understand we are in un-chartered territory.   The markets are incredible volatile.

If your buyer gets quoted a rate they can live with, they need to lock it that day!!  It may, literally, be gone tomorrow.