The mainstream mortgage market is no longer run or controlled by the banks. Wall Street has replaced the traditional bank and now pulls purse strings of this vast mortgage market via “mortgage backed securities.” A mortgage backed security (MBS) is simply a bond instrument in which anyone can invest. MBS’s are trading in the free and open market everyday just like stocks and bonds. The collateral for this investment is a group or “pool” of home mortgages just like the one you will use to finance your home.
The movement of interest rates in the mortgage market is directly related to the buying and selling the MBS’s on Wall Street. Why do some investors buy and why do some sell at any given point in time? Well, institutions, money managers, and individuals buy and sill these securities based on their opinion as to whether rates will rise or fall and whether they believe the interest rate paid on the security will give a good return for a long period of time. From an investors viewpoint, a falling rate may indicate to some a “sell” signal and to others a “buy” signal. The buying and selling of MBS’s is greatly affected by the investors’ return on the security as they view inflation—now and in the future. Some investors are more attracted to the MBS market than to the U.S. bond market because the return (yield) on MBS’s is in general higher and the risk is considered no greater. The mortgage backed security investment is seen as low risk because it is secured by home loans such as yours.
All investment markets (stocks, bonds, and MBS’s) can realize a period of stability as well as volatility base on the “perception” of these investors and the traders who make the actual transaction in the market place.
An important fact to remember about your decision to “lock or not to lock” is that both your commitment and ours are made on the “good faith” of the participants involved. We feel that a promise made is a promise kept, regardless of which way the market moves after the transaction is made. Residential lenders in today’s sophisticated market do not take interest rate risks because the cost is too great.
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When you apply for a mortgage loan in order to be guaranteed a rate prior to closing, the lender must first go to the market place and “buy” a commitment or promise to deliver your loan to a mortgage backed securities pool. To you, our customer, this promise is in response to your wishes to “lock” your interest rate rather than “float”, and our willingness to “buy” your protection. Of course, all of us consumers would like to be guaranteed the very best rate in an escalating market and also have a low rate offered in a declining market. Unfortunately, the market cannot provide this assurance in the normal course of business. If you choose to “float” your rate, you are at the mercy of the market and your interest could improve from the time your application was taken or rise as the market conditions deteriorate.
Please remember that loan officers are professionals in their field and not money managers or financial advisors. If you choose to lock, we will keep our side of the agreement and deliver the agreed upon rate so you will not have to second-guess your decision. If you choose to float, please ask other counsel or be your own best market advisor. You can lock at any time up to but no later than six business days before your closing date.
We hope this brief explanation of a very sophisticated, yet sometimes fickle, free, and open market system and how it affects your mortgage rate will help you in your decision. Perhaps an old and sage expression will bring more clarity to what we face together. “The man who lives by the crystal ball must learn to eat glass.”