And to OP, fixed meaning the rate does not change for entire loan. I've heard some non US folks describe their mortgages as "fixed", but only for a few years.
This is more of a problem in terms of how people understand their product - which is to say, it’s difficult to understand. Many people have adjustable rate mortgages which have a low initial rate for 1, 3, 5, 7, etc years after which point it floats.
These mortgages are good for people who believe they will sell their home within the time interval or, occasionally, the person who believes they will be able to refinance their mortgage.
However, as prior to 2022, mortgage rates were super low and an ARM offered little advantage against a market where you could get a 2.25% 30yr fixed, the became slightly less common the last few years.
Thanks, how common are 30 year fixed mortgages? In NZ, I've never seen a bank offer a fixed rate for any longer than 5 years, and 5 years tends to be 1.5 - 2% above a 6/12 month fixed rate term.
For the most part in the United States when people talk about mortgages and mortgage rate, they’re talking about the 30yr fixed rate mortgage. The United States government does a lot to prop up home ownership buy purchasing a lot of these loans so banks don’t keep them on the balance sheet. This is primarily done through Fannie Mae and Freddie Mac - both of which are government sponsored publicly traded organizations. They each have trillions of dollars of dollars under management ($4.23 and $3.03 trillion respectively).
In 2008 these companies were “too big to fail”, which I think might’ve contributed to some sort of a short term economic hiccup. /s
Canada and the UK tend to offer variable rate mortgages, or mortgages with rates fixed for terms of 1, 2, 3, 5 or 10 years, with corresponding premiums over variable based on the term risk. The US actually fixes the rate of the mortgage for the whole 25-30 year amortization period. That creates a LOT of funding risk for the lender, and generates a lot of the craziness in your mortgage market.
Maybe a better way to say it, is every mortgage in Canada is what Americans would call an ARM.
Wow - TIL. I really hadn't ever seen that, but RBC clearly lists a 25 year fixed. I struggle to imagine someone so risk adverse they'd lock in at 9.75% vs a 6% 10-year, but it is definitely there. I signed a 10-year early on in my career, and have run variable ever since.
So what if rates stay elevated? They shouldn't/can't keep their balance sheet this bloated forever.
The FED currently holds ~2.7T of MBS that they never should have purchased in the first place. That is damn near ~25% of the all outstanding MBS in the US (!).
In the short term anything can happen, but longer term there will need to be many investors with a big appetite for MBS to suck up that supply without rates surging higher.
Oh yea, these "dumb money" investors will also need to ignore the current all time high valuations and record low home affordability.
Most were bought after financial crisis, when rates were higher. And they are still selling treasuries under 3%, while collecting probably an average of 5%.
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[ 15.5 ms ] story [ 798 ms ] threadThese mortgages are good for people who believe they will sell their home within the time interval or, occasionally, the person who believes they will be able to refinance their mortgage.
However, as prior to 2022, mortgage rates were super low and an ARM offered little advantage against a market where you could get a 2.25% 30yr fixed, the became slightly less common the last few years.
In 2008 these companies were “too big to fail”, which I think might’ve contributed to some sort of a short term economic hiccup. /s
Maybe a better way to say it, is every mortgage in Canada is what Americans would call an ARM.
The Fed doesn’t target a run-off number, it targets a rate. That’s why it says it will run off “up to” $35bn per month.
The FED currently holds ~2.7T of MBS that they never should have purchased in the first place. That is damn near ~25% of the all outstanding MBS in the US (!).
In the short term anything can happen, but longer term there will need to be many investors with a big appetite for MBS to suck up that supply without rates surging higher.
Oh yea, these "dumb money" investors will also need to ignore the current all time high valuations and record low home affordability.
How are they making money if they bought when rates were ~2-3% and selling when rates are 5-6%?
A bond holder LOSES money as interest rates increase and must sell at a DISCOUNT.
Current mortgage rates are the highest they have been since the 08/09 financial crisis.
When exactly do you think they were buying 30 year MBS that would yield 5%?
At current rates, I would guess the FED has a sizable paper loss on their MBS holdings. Not that it matters tho.