Understanding Why Mortgage Rates Are Higher

To understand why mortgage rates are higher first need to understand how to get mortgage rates and how they are determined.
First and foremost, mortgage rates have increased mostly because of runaway inflation. When inflation comes in year over year at 8.6%, the value of a fixed asset such as a treasury bond or mortgage-backed securities is severely eroded and so the demand for those investments decreases significantly. When that happens the price drops very quickly until there is a much better ROI for the investor. In the last few months, mortgage rates on a 30-Year Conventional Loan rose from around 3% to around 6%. A 3% increase in just a matter of 3 months.
Secondly, what has compounded the rate increase and also makes it difficult for a borrower to get a rate with no "points" aka upfront money, is the fact that there has been little to actually zero demand - no bids on the secondary market - for mortgage pools at certain rate coupons. Basically unheard of! But why is that?
Well, let's say you and I are an investor looking for a fixed asset and we like the return that an MBS pool (mortgage notes bundled together) can provide us. The rates are low so borrowers won't likely refinance for a long time, there is valuable servicing income to be earned because of this and the investment is backed by assets that are almost assuredly going to perform due to low loan to values, low rates, and strict underwriting guidelines. Okay great, let's do it!
Well...when rates increase as quickly as they have and we see a recession is imminent, it becomes evident that rates have gone higher than they will be in months or possibly a year. So how are we going to earn our investment back if the loans we invest in right now are almost all refinanced/paid off within a year? We won't! So we need to put a premium on our pricing and in addition to that servicers won't pay a premium for servicing rights on these new loans. This leaves mortgage pools with very little demand and very low to no premiums paid by the secondary markets. This compounds the increase in rate from just being market-driven to also adding in the fact that because rates went up so high so fast that some rate coupons have zero demand. In addition to this, the servicing premiums have decreased between 30 and 80%.
The result is that in order to have any profit on the mortgage rates offered, you will most likely have to pay a point(s) or fraction thereof in order to get a competitive rate.

Don’t let this dissuade you though. The Rojo Mortgage Team is still working harder than ever to secure the best rates for their clients. Visit our website at rojomortgage.com or call Scott Rojo at 916-548-3942 to see how we can help you.