Last Week in Review: Stabilization in the MBS Market
One of the major effects of the coronavirus was the enormous destabilization of the mortgage-backed securities (MBS) market back in mid-March.
MBS pricing and trading activity determine home loan rates, so a big and fast solution was necessary.
Thankfully, the Federal Reserve quickly came to the rescue by purchasing MBS to help stabilize the MBS market — and it worked! Their massive MBS Bond buying program stabilized the market, helped the lending industry in numerous ways, and kept home loan rates in a sideways range throughout April.
Now the Fed, who was buying as much as $50 billion per day in MBS, purchased less than that amount this entire past week.
What does it all mean for homeowners or would-be homeowners today?
With the Fed buying significantly less MBS, there is a limit to how low home loan rates can go in the near-term, making today an incredible opportunity to capture historically low home loan rates.
Besides a sharply smaller Fed MBS buying commitment limiting the improvement to home loan rates, here are three additional reasons why home loan rates might not improve much further in the near-term, making today a great time to secure a home loan:
- Capacity at the lender level will limit how low home loan rates can go. Lenders are experiencing record mortgage volume. Whether a company is selling widgets or loans, when they are “flying off the shelf” the last thing a company does is lower price.
- MBS are now carrying an increased risk of default due to the current elevated unemployment rate. Investors in MBS will demand a premium for this risk, again putting a limit to lower rates.
- MBS hate good news. This week, stabilization in the oil market, and the idea that pockets of the U.S. economy will reopen, lend an air of optimism which limits interest rate improvement.