Orion’s management likes to remind our broker clients that mortgage rates are not controlled by the Federal Reserve or any specific entity. The vast majority of mortgages are bundled by Orion and other lenders and sold to Fannie Mae or Freddie Mac, or securitized through Ginnie Mae. Fannie and Freddie then create bigger bundles, called Mortgage-Backed Securities (MBS), and sell those on the open market.
It is a simple case of supply and demand. The price investors will pay for MBS determines mortgage rates, the higher price they will pay the lower rates will be, the lower price they pay the higher rates will be. Fannie and Freddie determine their purchase price for mortgages from lenders based on the pricethey get when re-selling to investors.
For mortgages that are not sold to Fannie or Freddie, such as jumbo (high loan amounts), Housing Finance Authority loans, or non-QM loans, many of which are offered by Orion, often the pricing is based on the prices Fannie and Freddie are seeing from investors and then are adjusted by lenders and investors for risk and demand.
Investors in mortgages, which could be huge insurance companies, pension funds, and money managers, or small banks and credit unions, make their decisions on what they will pay for 15- or 30-year fixed rate mortgages, or adjustable rate-mortgages, based on information they receive on economic activity, geo political news, and most importantly expectations as to what the economy will be like in the future. Strong economic times have higher rates, slow or weak economic times have lower rates. We have seen this relationship for many years.
Although the Federal Reserve (the “Fed”) does not directly control mortgage rates, the same economic conditions that motive the Fed the raise or lower the rates it controls also impact investors. The Fed does control, to a large extent, the rates for investments that will compete with MBS for investors.
When the Fed increases its benchmark rate by 0.75%, or 75 basis points, banks will increase their prime rate by 0.75% because it costs them more to borrow from the Fed and other banks. There are many credit instruments, such as credit cards, auto loans, lines of credit, education loans, which use the prime rate as their primary determinant for rates. If the prime rate goes up 0.75%, we can expectrates for consumer, and commercial, credit to go up as well.
Most analysts and economists expect that the Fed will continue to raise rates through the end of the year, and possibly into 2023. Note, however, that since January the Fed has increased its rate from near zero in January to 1.5% after its most recent rate increase. During this time, we have seen 30-year mortgage rates climb from 2.875% to 5.375% (down from recent high of 5.625%), significantly more of an increase than the Fed rate increase. Investors are anticipating higher rates from the Fed and the need for a higher return on their investments because of inflation. There is some hope, however, that 15- and 30-year mortgage rates may not go much higher. Time will tell, and Orion will continue to offer some great programs that other lenders do not. Ask your AE foroptions!