The mortgage market continues to move in response to shifting economic and policy dynamics. In this week’s Optimal Insights episode, Jim Glennon, Jeff McCarty, Alex Hebner, and Kevin Foley break down the latest developments, offering clear-eyed analysis and actionable perspective for mortgage professionals.
Here’s what you need to know this week.
Market Update: Policy and Volatility
Government Shutdown:
Day ten with no clear resolution; federal workers face delayed paychecks and critical functions are impacted.
The Senate passed a military spending bill to ensure active-duty members are paid, but most federal employees remain affected.
Lawsuits are emerging in response to potential layoffs, an unusual move during a shutdown.
Economic Data:
The Bureau of Labor Statistics is bringing back furloughed staff to release the CPI number, necessary for Social Security inflation adjustments.
Employment reports are also expected, providing critical insight into labor market conditions.
US-China Trade Tensions:
Renewed tariff threats and restrictive export policies on rare earth minerals have triggered pronounced market reactions.
Equity markets dropped sharply, and the 10-year Treasury yield approached a key psychological level of 4%.
Interest Rates and Refinance Activity:
The OBMMI index stands at 6.3%, with indications that rates may trend lower following recent market shifts.
Elevated market volatility and shifting rate expectations are driving renewed interest among borrowers, particularly in refinance activity.
Mortgage Backed Securities (MBS)
What is an MBS?
The team took a step back to provide a primer on Mortgage-Backed Securities. At its core, an MBS is a package of mortgages that gets bundled up and sold to investors. These investors range from pension funds to foreign governments, and the market is substantial with some $16 trillion in MBS floating around out there somewhere on any given day.
Why MBS Matter
The US mortgage market is unique in its scale and structure. The creation of Fannie Mae during the New Deal era enabled the 30-year fixed mortgage, a product that remains rare globally. This standardization fosters liquidity and price transparency, allowing for efficient trading and lower net interest rates nationwide. As Kevin Foley explained, if we did not have this central standard, credit markets would not be as liquid because you do not have the conformity. That whole component of the market helps keep interest rates net-net lower.
How MBS Influence Mortgage Rates
Mortgage rates are determined by the supply and demand dynamics of the MBS market, not directly by the Federal Reserve. The rate a borrower receives is a composite of several factors:
Risk-free rate, anchored to the 10-year Treasury yield
Risk premium, reflecting borrower creditworthiness and prepayment risk
Guarantee fee, paid to agencies like Fannie Mae and Freddie Mac to insure against default
Servicing and origination costs, compensation for loan servicing and origination, including adjustments for credit and property characteristics
Market Implications
The spread between Treasury yields and mortgage rates can fluctuate based on policy changes, investor demand, and agency activity. Potential shifts, such as the FHFA allowing GSEs to resume MBS purchases, could compress spreads and lower rates.
The US market’s unique structure supports robust liquidity, enabling efficient price discovery and rate stability across regions.
Shifts in asset flows, for example from gold to Treasuries, have nuanced effects on yields, but the sheer scale of the MBS market dwarfs most alternatives.
Actionable Advice for Mortgage Professionals
Monitor policy developments. Stay attuned to government actions, especially regarding agency MBS purchases and fiscal policy, as these can materially impact rate spreads and market liquidity.
Track economic indicators. Employment reports and CPI releases remain critical for anticipating rate movements.
Educate borrowers. Help clients understand the factors influencing their mortgage rates, including the role of MBS and the impact of market volatility.
Leverage data. Utilize platforms like Optimal Blue to access transparent market intelligence and refine pricing strategies.
This week’s Optimal Insights episode underscores the importance of vigilance and adaptability in the mortgage industry. From government shutdowns to global trade disputes, external forces continue to shape market conditions and borrower behavior. Understanding the intricacies of MBS and their influence on mortgage rates is essential for navigating uncertainty and capitalizing on emerging opportunities.
For a deeper dive into these topics and more, listen to the full episode of Optimal Insights.
Listen to the latest episode of Optimal Insights for deeper analysis and expert commentary. Available on all major podcast platforms: https://optimal-insights.captivate.fm/listen
The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Optimal Blue, LLC.