An MBS is a mortgage-backed security, or a collection of loans. When a borrower acquires a mortgage through a bank, credit union or mortgage broker, after the loan closes it is typically sold on the secondary market between lenders and investors.
(The largest of investors, Fannie Mae, Freddie Mac and Ginnie Mae are referred to as agencies. These three institutions buy the vast majority of loans regardless of type.)
The loans are then bundled into mortgage backed securities. One security may, for example be made up of 500 loans totaling $75M. These MBS are traded in markets very similar to stocks and other fixed income securities, and what investors are willing to pay helps drive interest rates.
MBS (also called mortgage bonds) are bought and sold on the bond market. They are typically purchased by individual investors, corporations and institutional investors. In the past, the government has been one of the largest investors in MBS. Mortgage bonds allow investors to invest in the real estate market. You can even buy and sell MBS and have a piece of what typically is a macro level investment driven by hedge and pension funds.
(Watch the movie The Big Short for a great explanation of the what and the why of the 2008 housing collapse when these rules were ignored. Spoiler alert: it’s a disaster when guidelines are ignored.)
Typically, bonds (MBS) are considered a much safer asset for investors so when the stock market is volatile (has a greater risk of both profit and loss), people tend to look to the bond market for security. Real estate is considered a very safe investment and volume in bonds can help drive the price, so when the price for mortgage bonds is up, this can drive interest rates down. When the price is low, rates increase.
What causes the interest rate changes?
Price changes which may affect MBS markets, and mortgage interest rates, typically occur in response to the release of news. Examples include the release of economic data, statements by Federal Reserve, and election results.
A key example is this past Tuesday, when Chairman Powell announced that core inflation is still higher than the government would like to see. That led to immediate (and likely correct) speculation that the .25% hike that was anticipated by investors will instead be a .50% hike. This led to the Dow dropping almost 575 points in a day and mortgage rates re-pricing higher thru the day. Typically, when the stock market sees a big drop, investors big and small flock to the safety of bonds backed by MBS. That didn’t happen this time. Investors and the market aren’t sure what to invest in, so money sits on the sidelines and both bond and stock markets suffer as a consequence.
What does this mean for future rates, and for you?
In general, rates tend to rise when there is economic growth, inflation and low unemployment. All those are true now, so mortgage rates will likely be on the rise. The best, and easiest, way for you to rate-proof yourself is to make the safe bet of becoming a real estate investor, by purchasing a home. It is the single greatest thing you can do to build wealth for yourself and generational wealth down the road. Here’s a link that backs this up for the last 69 years. Median Home Prices 1953-2022
If you're thinking that paying rent instead of a mortgage will save money - guess again! Rents in 2022 saw the largest uptick in history of 14% Nationwide. The DMV saw rents rise from 9-11%. In many cities rent is now equal to the average mortgage payment, and by securing your mortgage before the rates rise, you’ll be safe from future hikes.
TL;DR if you want to get a handle on what's pushing rates, check out the mortgage security market, and then invest in real estate to make sure you’re protected from future hikes.
Bonus tip: Keep and eye out for the Treasury 10-year bond! It’s the most closely followed by investors; the higher the 10-year treasury yields go, the higher mortgage rates will tend to follow!