Eugene Loan Guy

The Federal Reserve has been purchasing Mortgage Backed Securities for some time now and mortgage rates still aren’t at 4.5%. So ,what gives? Well the answer is really not that hard, nor is it that simple. First of all you need to understand what Mortgage Backed Securities are and how coupon rates compare to the actual interest rate. Below is the chart of MBS purchases from the New York Fed, Feb. 12-18. You can look at their site here.

Take a look at the Coupon and the amount of purchases (in the millions) from FHLMC (Freddie Mac), FNMA (Fannie Mae) and GNMA (Ginnie Mae). As you can see, most of the MBS are 30 year and there is very little 15 year being purchased.

Now, if you notice, the majority of these purchases are in the 4.5 and 5% coupons, although other coupons are also being bought. So, what does a 4.5% Coupon really mean? Is that the rate being offered to the consumer? Short answer – No!

The difference between the “coupon rate” and the interest rate offered to the borrower is what the originating firm, the wholesaler, the agencies like Fannie and Freddie, and the Wall Street securitizing firm get to put the product together. At 4.5%, the interest rate the customer pays will probably be 5.5 or 5.75%. So, what does that mean about what the Fed is doing? Well, they are being pretty smart, they are buying the higher coupons that will probably be paid back in fairly short order as rates drop. Like the 5, 5.5 and 6% coupons are being paid right now with rates hovering around 5%.

So, will rates drop to 4.5%? Will they drop to 4%? I can’t tell you. What I can say is that if it makes sense to refinance or purchase at 5%, it might be a good idea to do that now. Trite it might be, but “A Bird in the Hand, is Worth Two in the Bush!” When you are at 6.5%, a 5% interest rate is better than not having a 4.5% interest rate. Give me a call today to discuss your specific issues. Every person and every loan is different. 541-342-7576.

One Response to “New York Fed buys MBS – Rates Stable”