Interesting Confrence Call On Interest Rate Direction & Risk

I just finished a great conference call with Mortgage interest guru Barry Habbib. He had a pretty detailed rational behind his forecast for higher rates going higher as the year continues. As an industry insider I tend to take for granted that "everyone" understands what drives the interest rates and how the media puts out numbers on rates that are useful within their context but a little misleading when out of context. So I thought I would cover a few key points today.

The media tends to put out numbers without fully explaining the context. First off, the Freddie Mac rate survey and the MBA rate survey. These numbers are generated by the organization but have build in margin (.75% on the Freddie and 1.25% on MBA). What they don't mention is that these are rates from the PAST! The information is a week old when published and older than that when typically reported. Not to useful as a "shopping tool".

There are a lot of players in the mortgage food chain. The lender (bank) does not typically keep the mortgage (interest rate risk of keeping the mortgage is too great). So the lender then sells the asset, but retains the servicing. In the process they take a slice. They sell the asset to Fannie Mae or Freddie Mac. Fannie and Freddie don't want to hold these assets, so they pool them and create a mortgage backed security to sell on the bond market (and take a slice of the pie too). So say you have a mortgage at 5.25%, the end investor buying the loan as a mortgage backed security might only being seeing an actual yield of 4% or less after everyone has taken their piece of the transaction.

The Fed has been buying huge amounts of MBS at 4% and 4.5% range, holding the market down. Now they are no longer buying those securities and we have seen the price being offered at the MBS auctions decrease (price decrease equals rate hike). The government is sitting on about 1.25 Trillion worth the MBS. Now the government has said if they see inflation they will sell these securities to keep inflation under check. When they start selling this portfolio rates will rise as the market because of market saturation.

The long and sort of the call is that the upside for mortgages would be a decrease in rate of maybe .25% (best case scenario) but the risk of rate increase is significant and if they move they have the potential of worsening by 1% to 1.5%! Bottom line, he feels locking in rates (and profit) is the best course of action.