Mortgage Loan Underwriting Requirements

Mortgage Rates California – Thoughts You Should Know

How mortgage loan rates are determined and what causes them to move is an absolute mystery to most folks – and people that believe they know are commonly incorrect. As a former mortgage banker I can let you know that a whole lot of people within the mortgage business cannot even give you an accurate answer to that question. So what is the mystery and misinformation all about? Let’s take a uncomplicated look, in plain English, at what moves mortgage rates and (just as importantly) what does not. A different web resource is this site.

Ask a bunch of the pals what mortgage rates are depending on and they’ll let you know they may be not confident however it has one thing to complete with Ben Bernanke and also the Federal Reserve. Some of the additional financially savvy pals could let you know that rates are depending on the 10 year treasury yield. Each answers are incorrect. The uncomplicated truth is the fact that mortgage rates are depending on the mortgage backed securities (MBS) industry. I know – this really is beginning to sound scary. I promise to keep it uncomplicated – here’s a fast explanation of what a mortgage backed security is. Banks and mortgage lenders take big bundles of their mortgage loans and pool them together to become sold as investments. These debt obligations trade as bonds (mortgage backed securities). An investor can invest in a pool of mortgage loans and get earnings depending on how those loans perform (do they spend on time and so on…). The mortgage backed securities industry is usually a segment in the overall bond industry. The MBS industry reacts and moves depending on economic news and indicators similar to how the overall bond industry functions.

To take this one step further, here’s the technical explanation for all those of you who’re knowledgeable in matters of finance. MBS rates, and consequently mortgage rates, are directly determined by variances (or spreads) between it (MBS Rates) as well as a monetary derivative instrument referred to as interest rate swaps. These swaps are employed by investors to manage, hedge, or speculate on danger. The rate on a swap rate is usually a fixed interest rate that one would get in exchange for the uncertainty of having to spend the short-term LIBOR (London Interbank Offered Rate) rate over time. Moreover, mortgage rates are influenced by relative spreads between interest rate swaps and treasury notes.

So why does every person believe that the Federal Reserve controls mortgage rates? Your guess is as superior as mine. Probably the most likely cause is the fact that misinformed people within the media just maintain talking concerning the fact that the fed lowered interest rates and mortgage rates will follow suit – and we maintain listening. The fact in the matter is the fact that the actions in the Federal Reserve do have an impact on mortgage rates however it is indirect and frequently exceptionally delayed. When the fed announces that they may be lowering short term interest rates, this has an immediate impact on some kinds of consumer loans for instance house equity loans and credit cards. It also has a negative impact on the interest rates on saving vehicles like money industry accounts and certificates of deposit (for the reason that those rates go down at the same time). It does not on the other hand, have an immediate or direct impact on mortgage rates. The indirect impact on mortgage rates in the fed easing (lowering) short term rates is the fact that it causes investors to flee investments like money markets and CDs and put additional money into the stock and bond markets. When people purchase additional bonds (such as mortgage backed securities) this causes bond prices to rise. When bond prices rise, the yields of those bonds go down. Lower yields on mortgage backed securities equal lower rates. This chain of events that started with the fed lowering rates and ended with mortgage rates going down could take months to unfold and dozens of other economic events could intervene and maintain that chain of events from happening as predicted.

The other common misconception is the fact that mortgage rates are tied towards the long-term Treasury notes. Not true. Should you look at long-term charts for mortgage rates and long-term treasuries side by side you are going to see that they trend together more than a lengthy time frame. As mentioned above, the spread between interest rate swaps and treasury notes do influence mortgage rates – however it is inaccurate to say that there’s a direct link between the two.

We’ve just covered the fundamentals on how long-term mortgage loan rates for instance the 30 year fixed rate are determined. Short term mortgages like five year ARMs and 7 year ARMs is usually depending on a variety of distinct indices.

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Mortgage Underwriting Standards