The State of Lending: Trader Uncertainty Anyone?


The Chinese have a saying: “May you live in interesting times”. Well, I don’t think there are many people out there who think that things have been boring lately. In the last weeks, mortgage markets whipsawed as the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.

From day to day, huge rate swings made mortgage rate shopping difficult. It wasn’t uncommon for lenders to change pricing 3 times per day. Last week’s constant mortgage rate movement had several causes:

  • Retail Sales data was weaker than expected
  • The Federal Reserve report showing a slowdown in all 12 regions
  • New evidence that commodity inflation pressures are easing

The biggest driver was — and continues to be — trader uncertainty.

If you’ll remember, the first $250 billion of the government’s Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation’s largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates — more than 20% of the S&P 500 will report their July-September 2008 numbers.
If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve. As I write this post today, the mortgage backed securities market is up over 50 basis points which is good for mortgage rates. As the MBS market goes up, rates go down—it is an inverse relationship.

I want to take a little time to thank Josh Dorkin for allowing me to write for the BiggerPockets blog. I will be doing a mortgage market post every Monday. Hopefully you will find my mortgage market musings informative and helpful when making your real estate investment decisions.

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1 Comment

  1. “Housing market crisis and mortgage turmoil”…these are some of the recent headlines in the media with regards to the current mortgage market. Mortgages can be complicated even at the best of times, but with the number of mortgage products diminishing and interest rates changing everyday, even the savviest consumer can be finding it hard to keep track of how the market is changing and what current factors need to be considered when trying to secure a mortgage.

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