Mortgage bonds get hammered and rates rise

Mortgage Backed Securities are taking a beating this morning. As of this writing they were down 78 basis points from when the markets opened. That is a huge fall. Lenders usually raise rates after a 16-19 basis point change for the worse. It’s only mid-day in the East Coast and we have a very steep fall. Any conventional loan tied with Fannie Mae and Freddie Mac is going to see an increase in rates today.

There are many reasons why the market is beating down on bonds and in a global economy, foreign markets are driving much of the action. As CNNMoney is reporting, the US bond market is feeling the jitters because the major economies are all raising interest rates:

From Canada to England to Japan, central banks around the world have been raising rates amid growing concerns about inflation.

How does this affect US bonds? Well, for one thing now global investors can park their money elsewhere and get a decent return, the US is not the only place. We have already been seeing a drop off in demand for US bonds and it’s not getting any better. Less demand for US bonds translates into higher bond yields (interest rates).

I expect the 30 Year fixed rate to take a great leap forward towards 7.00%. What does this mean for consumers? On a $200,000 loan a 0.5% increase in rate results in a
$66 increase in payment. Looking at it another way if a borrower felt comfortable with a $1,200 monthly payment they would have qualified for a $200,000 home. With a 0.5% increase in rate they now can only qualify for a $190,000 home. It can be a pretty big difference in a market like Phoenix. Of course the higher the purchase price the larger the changes to purchase price and monthly payment.

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