The cyclical nature of the mortgage industry


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The ability to look beyond the present and develop strategies that enable an organization to be successful in the future is the key to any leadership position in almost any business. This is true for the mortgage industry and in particular for the long-term strategies we have developed to respond to the current low interest rate environment caused by a global pandemic.

One of the most fascinating factors driving rates down has been the decoupling of duration and swap spreads for mortgage-backed securities, which, ironically, analysts expected to be short-lived in 2020. This rebound caused a rate cut that prompted millions of homeowners to refinance their current home loans throughout 2020, resulting in unprecedented lending volume for the entire mortgage industry.

While much of the mortgage industry focused on low mortgage rates last year, it’s important to understand the anatomy of what drives rates. In the United States, the federal funds rate refers to the rate that banks can charge other banks for lending excess cash from their reserve balances on an overnight basis. This rate can influence short-term mortgage and credit card rates in addition to impacting the stock market. This rate is also set by the Federal Open Market Committee.

Although they cannot charge a particular rate for all Federal Reserve can adjust the money supply so that interest rates move towards the target rate – when they increase the amount of money in the system, the rates go down, when they decrease the amount of money, the rates go up. This rate is set eight times a year depending on economic conditions.

Over the past year, Fed Chairman Jerome Powell has consistently promised that the Fed will continue to buy mortgage-backed securities to stabilize the US economy, which has increased the amount of money. in the Federal Reserve System and cut rates.

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