A Realtor's Guide to Mortgages in the Financial Markets Part 1

A Realtor's Guide to Mortgages in the Financial Markets Part 1

What does Wall Street have to do with the Real Estate Market? Everything. I’m sure that as a Realtor the last thing on your mind is, ”Hey, I wonder how the DOW closed today?” (unless, of course, you’re invested in the stock market). Unbeknownst to the majority of Real EstatProfessionals out there, mortgage rates and loan programs available to your buyers, are directly correlated to Wall Street.

 

In reality, the main reason why mortgages are readily available is due to Wall Street and the Mortgage Backed Securities (MBS) market. Were it not for these assets, there would be very little liquidity for institutions to extend credit to potential buyers. As far back as the 1980s, the onlyway to get a mortgage was your local community bank and pray to God they would still be willing to allocate their capital to mortgages and not auto loans or other consumer products; that might yield a higher return.

 

What is a Mortgage Backed Security (MBS)? They are pools, or groups of mortgages packaged into securities and are sold in the secondary market, a.k.a. Wall Street. One specific bond or security can be made up of 1,000 loans totaling $100,000,000; each with similar characteristics.For example, Single Family Homes only, credit score between 700 and up, LTV range of 75-95, DTI ratio of no more than 50% — you get the point. Essentially, the higher the risk of the borrower equates to higher rates and cheaper bond prices.

 

 

 

Home Financial Group A Realtor's Guide to Mortgages and The Financial Markets Part 1
Home Financial Group’s –  Realtor’s Guide to Mortgages in the Financial Markets Part 1

 

Have you ever had your mortgage professional tell you, “Hey, I’m calling our client Joe Shmoe and getting his okay to lock his mortgage rate at 4.75%, markets are going crazy!” No, the loan officer isn’t pretending to be Gordon Gecko trying to short Bethlehem Steel Stock (shout out toall my classic movie lovers ?). Much like stocks, MBSs are traded in the markets frequently every day. What investors are willing to pay for these will drive interest rates higher or lower. We have seen a quarter of a percentage fluctuation in a matter of hours before! On a $300,000 that might mean an extra $750 needed to obtain a desired rate!

 

The MBS market is very similar to equity (stocks) and other bond markets. There are many factors that influence the MBS prices which in turn affect mortgage rates; such as, economic, social and political factors. I will outline the factors and their implication on mortgage rates inanother article — stay tuned!

 

 

Home Financial Group A Realtor's Guide to Mortgages and The Financial Markets Part 1
Home Financial Group’s –  Realtor’s Guide to Mortgages in the Financial Markets Part 1

You are probably thinking to yourself, “How is this going to help me get more leads and close more deals?” Knowledge is power, especially in the real estate industry. Even if you mostly focus on listings, most of your potential buyers will be obtaining a mortgage to buy your listing. It isvery important to understand how the economy and current political events will affect the buying power of your potential clients using a mortgage for financing. Therefore, the MBS market is a great indicator of how the real estate market will react. Mortgage rates remain at a historicallow (although we have seen a rise in the past few years). But are projected to rise, which will most likely shift the current seller’s market (low inventory, bidding wars, contracts for above asking, etc), to a buyer’s market.

 

Stay tuned for upcoming articles on the background of the current MBS market and the factors that affect Mortgage Rates.

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