For the technically inclined, here’s what this means: when Fed buys mortgage-backed securities, it is purchasing notes that are secured by mortgage contracts.  Those contracts are the documents you sign at the closing table.  Retail lenders – like me – originate mortgages and fund them, having usually pre-sold those loans to secondary lenders (this is called warehousing), which will bundle them up and sell them to FNMA/FHLMC (Fannie and Freddie).  This flow is critical to what most people think of as the mortgage process.  The mortgages back securities that allow banks to replenish their supply of cash to lend out again.  If the Fed starts buying those securities, the flow increases in the pipeline and lenders can lend more money.

With the collapse of the credit markets, the flow has been severely restricted and that has made mortgage lending sort of like being in the middle of the ocean dying of thirst.  There’s money everywhere, but we can’t lend it, because the secondary lenders have to restrict their flow to only the very choicest of loans, because those are the only ones they can securitize.  That flow will free up at some point and those outside the top 10% of borrowers will once again be able to borrow money.  In the meantime, the Fed action prevents the last trickle from freezing up as well.  The buying pressure reduces risk in the MBS markets, raising their prices and lowering their yields.  Since (in a circle, now) the yields on those MBS dictate to lenders what their risk is on mortgage lending, as those yields drop, rates drop with them.

Whew.  Still with me?

Yesterday, because of the Fed announcement, bond prices exploded to the upside and yields dropped like a stone.  That should (under ordinary circumstances) have meant a large drop in mortgage interest rates.  But it didn’t.

Rates on mortgages took only a small dip yesterday.  I say “small” because it was not nearly as big a move as would be expected from the way the bond markets moved.  Why is this?  Two reasons: one, refinance pipelines are choked, and I mean choked.  Our staff starts work at 6am and finishes (last night, for instance) at midnight.  The in-house underwriting staff at City1st is pulling 16-hour shifts and has been since roughly Christmas.  Secondary market lenders are doing the same with their staff – remember, a LOT of people got laid off last year, and most lenders went very lean to try to stay in business.  That means loans just can’t get through the pipe very quickly.  To slow the flow, lenders keep their rates artificially high.  Two, lenders know that most of their volume on these loans is coming from refinances of loans they already hold.  They’re not getting new, high-performing loans without losing older, higher-interest loans at the same time, so this boom is not necessarily good for them.  They’re being defensive about rates, and there are lots of good reasons for them to do this.

Meantime, expect rates to be at 5% for FHA and slightly below for conventional, depending on about 100 different factors that could make your rate higher or lower.  Call or email for specifics.

This is going to be a fun few months, folks.  Stay with us, and keep your arms and hands inside the car at all times.