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Where is my cheap mortgage?

The rates are down, why aren’t mine?

Unexpected for many, the rise in residential mortgage rates is complicating the central bank’s efforts to stimulate the economy.

In an unexpected move during an emergency meeting on March 3rd
, the Fed lowered the federal funds rate to 1.25%, from 1.75%. The 10-year treasury rate fell to a low of 0.56% but where under normal circumstances  mortgage backed securities (MBS) yields tend to track the 10-year Treasury note, mortgage spreads blew out and the 30-year fixed rate mortgage rate spiked 4.12% on Friday up from 3.55% at the beginning of the month. On Sunday, in another drastic step, the Fed has indicated they will be pulling out all the stops in an effort to stimulate the economy, dropping the federal funds rate to effectively zero in a last ditch effort to ward off market fears driven by the coronavirus.

In contrast to residential mortgage rates, we have seen commercial mortgage rates drop to all-time lows. Borrowers of low-leveraged multifamily assets can lock in 5-year fixed balance sheet money for as low as 2.75%. Unprecedented until now.

Consumer mortgage rates are responding to a logjam in the $7.5 trillion MBS market, where most U.S. home loans are bundled into securities guaranteed by Fannie Mae and Freddie Mac. 
The MBS market is usually the second most liquid market in the world after treasuries. Current levels of liquidity are on par, if not worse than, what we saw during the financial crisis 10 years ago. The market is telling the Fed that an intervention is necessary to keep the market functioning.

The Fed must enter the market directly and buy MBS to effectuate a broader monetary policy and prop up confidence. It remains to be seen if their plan to purchase $700 billion in Treasury securities has the
desired effect.

Equicap is a real estate investment banking intermediary firm arranging debt and equity for commercial real estate owners and developers. Email Daniel at dhilpert@m-equicap.com or call at 917-586-8364.

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