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How Does the Economy Impact Mortgage Interest Rates? Special Guest Tony Blodgett

Updated: Oct 5, 2021

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A unique interview at The MLO Show with Tony Blodgett, Certified Mortgage Banker with 24 years in the Mortgage banking industry.

Blodgett shared insights about the real estate industry into one little package that people can take away and understand. Like, hey, traditionally you might have heard, interest rates are because of an agency. Now there's been another whole curveball in the last 18 months with the pandemic stimulus the economy, there's a lot of new moving counterparts to the United States right now.

Another important point that Blodgett explained is how the current environment is a little bit different from the real estate “playbook” and how moves by the Federal Reserve are really impacting interest rates today. As well as what might happen next, what steps might the Fed take as we get through this pandemic and what the impacts of that might be to interest rates, along with what people should expect to move forward in regards to interest rates.

What we know is that prior to the pandemic the interest rates were moving a whole lot for quite a long time, like maybe you see tiny little bit of movement over the span of like 30 days 45 days, but to give a little bit of a perspective now it's August 202, but before the pandemic it wasn't moving very quickly and then I remember when things were really starting to shake. At some point we saw that 150 basis points swing to the consumer out there. I’m talking of a margin of a half percent even upward of a 1% change in interest rates right for the home buyer, this is hundreds of dollars a month on their mortgage, as well as some people might not qualify for the home they were trying to buy in the afternoon when they did in the morning. It was truly a really stressful time for the originators on our team.

Blodgett expressed how it actually was a lot scarier when the pandemic started. It was a lot scarier than I think even what “the public certainly knew, but even most loan officers didn't realize exactly what was going on, and there was a period of time where, because of the stock market crash so one knew what would happen through this pandemic with house prices and foreclosures.” He added how people were scrambling to figure out what to do with the loans, for those even funded behind the scenes and there was a lot of scary stuff going on. The good news is that the federal government came out pretty quickly, removing a lot of uncertainty about what's going to happen with these mortgage backed securities. Their intervention gave back confidence to the market by buying as many loans as was needed to stabilize the market.

This is why there were a couple of days where interest rates spiked up, but went right back down during those couple of days and then stabilized after the government intervention. They continued to buy mortgage backed securities and continued to renew their commitment to invest in not only US Treasury bonds, but also mortgage backed securities and they're still doing that until this day. Their commitment was $40 billion a month but if you look at what they're actually purchasing it's significantly more than that. Over the last year, it's four to five times that amount, so mortgages are getting paid off. Blodgett highlighted that the reality is that interest rates are record low right now and the reason for that is that the federal government is creating their own demand in today's market.

Another way to explain this is when the pandemic started, the real estate market had a large supply and zero demands, once the government step they created a balance, but the questions is,

How long is that gonna last? Blodgett expressed that the bigger question is, what everyone's watching right now is? “Like I mentioned, the Fed has always stepped in when they needed to and happened after the last crash that the Fed was purchasing mortgage backed securities...when the Fed starts talking about pulling back the amount of mortgage purchased, the market usually freaks out as a result of that.” He also explained that mortgage backed securities in the United States are a great investment. The bond market is huge, and there's a lot of dollars in the bond market. As well as the foreign investments. “I firmly believe that even as the Fed starts to taper there will be demand for these mortgage backed securities that perform very well. They have decent yields on them a better yield than the than the US Treasury right but still backed by the full faith of the government because Fannie and Freddie and and how these are securitized, and so I don't think we're going to see a massive increase in interest rates necessarily this time around, because where else are people going to put their money that safe, secure and give them a decent return on their investment.”...

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