Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.

Over the past seven trading sessions, yields on the 10-year United States Treasuries have dropped almost 40 basis points. Earlier this week, the 10yr briefly dropped below 2.06 before closing the day at 2.081, which is fundamentally right above a strong level of resistance. For those who are watching the development, lower treasury yields historically mean lower mortgage rates. That said, however, the pricing of U.S. Treasuries are mechanically different than the actual pricing of residential mortgages which are determined via “Mortgage Backed Securities.”

For those familiar with the contrasts between Treasuries and mortgage securities (“MBS”) the above might not bring any new conclusions, but what many may not be aware of is that the spreads between Treasuries and MBS bonds might be diverging soon, if not already. There are a lot of critical factors at play in the marketplace now, and for anyone looking for mortgage financing, or exploring options for mortgage refinancing, things are starting to get interesting.

The internet does a great job disseminating information, but it’s always a challenge to know what is true “data” (facts) and what is “analysis” (i.e., one person’s opinion). The lines between the two are continually getting blurred as “talking heads” and “fake news” are easily broadcasted in attempts to manipulate opinion and influence decisions accordingly. Yes, the economy is weakening. True, inflation is not where The Fed and policymakers would like it to me. Indisputably, the China trade negotiations are taking its toll on the U.S. and global markets. Admittedly, the stock market is ‘due’ for a correction. The list of financial and economic indicator “woes” goes on.

The question that I am left to answer to all of my clients is, where do I see mortgage rates heading from here?! If I would be able to answer that question with certainty, I would definitely ‘quit my day job’ and make a lot of money trading the market. The answer is – no one knows for sure, but what I do know is that the fundamentals of the mortgage-backed securities market has changed considerably over the past few months, and most people are unaware of some discreet moves by The Fed that are starting to play out in the markets now, and even more so in the months to come.

In March of this year, the Federal Reserve met and released its policy with projections and market opinion. The signal was that the Fed would likely not be raising their target Fed Fund rates in 2019. But, more importantly, in a separate statement, the Fed said it would start slowing the shrinking of its balance sheet in May, allowing the mortgage and agency bonds it bought as part of quantitative easing to “run off” without further reinvestment.

The announcement called for a significant fifty percent reduction in the allocation of monthly redemptions of Treasury securities! They also noted they would halt the reinvestments altogether at the end of September. Additionally, starting in October, money The Fed gets from principle and interest payments on its mortgage bonds will be reinvested into Treasuries, as they intend to shift most of its portfolio into long term Treasuries over time.

We are starting to see the impact of the March 2019 Fed announcement come into play. Regardless of what your predictions are for the Equities and Bond markets, irrespective of what you think the likelihood of a recession is, and notwithstanding what happens with China – The Fed has already charted its course for how they would like to see longer-term yields play-out, and it will have a short term and long term impact on mortgage rates. I assure you most bank “loan officers” do not know most of the above, let alone the effect it will have and how to “play” the current market for your benefit. Be careful out there!
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