Understanding Mortgage-backed Securities Effects on Rates

Mortgage Rates these days are on a roller coaster ride. To better predict where they are heading next, let’s break down understanding mortgage-backed securities’ effects on mortgage rates. 

Understainding Mortgage-backed Securities for Metro Detroit

Understanding Mortgage-Backed Securities 

Have you ever wondered what’s really behind the rise and fall of Mortgage Rates? I sure did! After 20+ years in the business in Metro Detroit, I’ve seen higher 10-year treasury yield rates and lower mortgage rates. I noticed something interesting. I found a consistent gap by comparing the yield rate and mortgage rate. So, I made a spreadsheet with the 10-year treasury yield, gap numbers, and mortgage rates. And guess what? A pattern emerged! 

The Next Step 

I then turned to Google to understand the gap between the 10-year Treasury Yield and Mortgage Rates. That’s when I discovered that mortgage-backed securities play a massive role in determining current mortgage rates and predicting their future direction. This was a huge “aha” moment for me.💡 If you’re curious about how mortgage rates are set, I suggest reading the blog post and watching the video “Understanding Mortgage Rates.” Spoiler Alert: It’s not all about the Federal Reserve raising or lowering interest rates!

What Are Mortgage-Backed Securities?

Mortgage-backed securities, or MBS, are a bit like bonds. They’re made up of a bunch of home loans that banks have sold to investors. When homeowners pay their mortgages, investors in MBS get a share of those payments. It’s a way to invest in real estate without buying the property yourself. Understanding MBS can give you insights into how mortgage rates are determined, helping you make informed decisions whether you’re looking to buy or sell a home in Metro Detroit. Plus, knowing how to track yourself, you can bypass much of the noise you hear or read. 

Why Mortgage-Backed Securities (MBS) Matter to You

MBS is a key player in making homes more affordable. They give banks the cash flow to lend more for home buying. This magic keeps your borrowing costs down and makes it easier for everyone to get a mortgage.

How Mortgage-Backed Securities Move the Needle on Mortgage Rates

The dance between the price of MBS and your mortgage rate is a close one. It’s all about supply and demand. When many investors want to buy mortgage-backed securities, their prices go up. But the interest they pay, or their yield, goes down. That’s good news because it means lower mortgage rates for you. On the flip side, if fewer investors want to invest in mortgage-backed securities, the interest rates and your mortgage rates go up. The big-picture factors like inflation, the job market, the economy’s health, and what the Federal Reserve does also shake things up.

Now You Know How to Cut Through Mortgage Rate Noise

Getting the lowdown on MBS can shine a light on how mortgage rates move. With this insight, you’re in a better spot to pick the right time for a home loan or a refi.

Important ~ Track the Gap

We are now at a turning point in the housing market and will see a shift in 2024. Tracking Mortgage Rates, the 10-year Treasury Yield, the MBS gap, and home prices will determine your mortgage payment. This is the most critical puzzle piece to know if mortgage rates are trending up or down. Let’s review what we do know. Goal # 1 is to see the MBS gap rate stay below the gap rate of 2.7% and work it way back to the 50+ year average of 1.72%. As you can see by the graph, we were heading in the right direction based on the speculation of what the Federal Reserve would do with interest rates, but the economy and job market are strong, and no rate cuts. The Yield numbers and gap are up, and so are mortgage rates.

The MBS Gap Affects Mortgage Rates

Knowing how mortgage-backed securities (MBS) and mortgage rates work is key to saving money. Soon, you’ll master this, knowing exactly when to buy your new home confidently.

Calculate the Gap
  •  Step #1 ~  Start with the 10-year Treasury Yield average for the week.
  • Step #2 ~  Next, access the mortgage rate for the week. I use two sources: 1. Freddie Mac PMMS (this is a survey of lenders what they are charging) and 2. Mortgage Daily News ( I can track rates, Volatility Index, and MBS)
  • Step #3 ~ Subtract the rate from the Yield, and now you have the gap #.

The graph uses teal to show the average 10-year Treasury Yield Rate and orange for the MBS gap rate. The mortgage rate is shown as a percentage on top. The graphs on the left and right sides show “What If Scenarios,” highlighting the importance of tracking the MBS Gap and its effect on your mortgage rate.

Gap Graph Breakdown

Your base is the 10-year Yield at 4.297%. The left graph shows a gap at the 52-year average of 1.72%, making the mortgage rate 5.82%. On the right, since March 2022, our MBS gap average has hit about 2.705%. That’s our benchmark for predicting whether mortgage rates will likely decrease over the long term. The middle graph shows the average Yield minus the average mortgage rate, which equals the average gap rate. According to the graph, unfortunately, the trend is increasing, so mortgage rates rise above 7%. I hope that breaks it down clearly for you!

Key Insight

Understanding the weekly MBS (Mortgage-Backed Securities) gap rate is a game changer for predicting mortgage rates. Want to get the lowdown on mortgage rates and their journey? Check out “Understanding Mortgage Rates.” To stay in the loop with daily mortgage rate changes, dive into “Today’s Mortgage Rates: What’s Driving the Change .” And for a sneak peek at future mortgage rates, don’t miss “Navigating Mortgage Rates ~ Empower Your Move.” I’ve laid it all out in my blog, complete with extra links to turn you into a mortgage rates expert before you know it.

If you find this information useful, like and share it with your friends and family.
 

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Pam Sawyyer @ Metro Detroit Home Experts

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