Loan Officer Training 09/25/2024 - How To Analyze Interest Rate Fluctuations

Understanding interest rate fluctuations is crucial for any successful loan officer. In this episode of Loan Officer Training, we dive deep into the world of interest rate analysis—why rates move, how global and domestic factors impact them, and what this means for your clients. Learn how to read market trends, predict shifts, and effectively advise borrowers on the best times to lock in rates.

Whether you’re navigating a volatile market or helping clients find the best deal, this episode will arm you with the knowledge and tools to stay ahead of the curve. Tune in and sharpen your skills to become a trusted expert in interest rate dynamics!


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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

Our Mortgage Loan Originators are trained to be loan consultants to guide borrowers throughout the entire loan process. A lic

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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Sep 25, 2024 • 04:04:57 PM: 0:13

Welcome everyone Welcome everyone My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our president Nick Hiersche and our CSO, Jose Gonzalez. We are a lender that specializes in non QM loans and what we do every Tuesday, Wednesday, and Thursday at 12 PM Eastern on this show. Let's go through a new loan officer training topic. Today's going to be a nice general topic of how to analyze interest rate fluctuation. So Jose, I'll go ahead and let you take over from here so we can talk about that. Yeah, this is what's on everybody's mind right now. What is going on? I thought that they said that their rates were going to go down. Well, um, that's why we're going over this today so that you can see what are the relationships. And, uh, different, uh, things that do affect the rates on, uh, mortgage loans. So let's get right into how to analyze interest rate fluctuations. So we all know that interest is the price that a borrow, that a An individual pays to borrow money, and it is typically expressed as an annual percentage rate. Now, with that being said, let's analyze the components here, uh, that the Fed controls. Well, what is the prime rate? That is the interest rate set by the Fed. that commercial banks charge credit worthy borrowers. So that's the prime rate. That's the one that the, um, um, lines of credits, HELOCs, for example, that's one of the, um, indexes that they like to tie the rate on a HELOC to, the prime rate. It is also based on the Fed funds overnight rate plus a margin. That's the prime rate. Now the Fed funds rate, that is the prime rate. Uh, that is set by the Fed, which banks, uh, borrow and lend overnight to one another. So you have banks, all the banks that participate in the Fed, they have to have a minimum capital reserve requirement and how they cover those shortages is they borrow overnight from other banks. That have overages and the rate that they pay is called the fed funds rate. Those are called fed funds and that's the fed funds rate. So that's the one that the fed directly controls. The Fed Fund, and that's the one that trickles down and controls all the other indexes. Now, U. S. Treasury securities are the debt obligations issued by the U. S. government and secured by the full faith and credit of the U. S. The rate on U. S. securities is also set by the Federal Reserve. Now, you all heard recently, oh, the Fed dropped the rate a half a percent. Well, that was the Fed's fault. Funds rate that's a overtime. That's overnight lending rate only. Um, that doesn't necessarily mean as we've seen in the last couple of days that the interest rates on the U. S. Treasury securities will follow because if you've been following the 10 year, which is the one that has the most impact on mortgage rates, the 10 year has actually gone up in the last couple of days. Uh, and the reason it's gone up is because investors, secondary market investors are betting that we're not going to have a recession. So, you know, they're, they're hedging higher rates in the future. So they're issuing their instruments for a higher rate. Uh, so the U S trade securities are used by the government to help fund operations. And, uh, it is also used to affect the money supply through monetizing. What does that mean? That means, uh, that one agency issues the instrument. And the other government agency buys the instrument. They're essentially, uh, buying it from themselves when they're monetizing. That's an artificial way, uh, to increase the money supply, but in increasing the money supply, what they're doing is diluting it because it's not increasing the money supply through, uh, increased production, right? It's increasing it artificially. So that's, uh, Quantitative easing. I think they call that when they're monetizing like that. And we did mention that mortgage rates tend to follow the 10 year treasury, which is the one you should be following on a daily basis to see what may be happening with our 30 year and 15 year mortgage rates. So now I gave you some context on the instruments and what actually, you know, what they're used for. Well, let's have a little bit more in detail now about the Fed, right? I alluded to some of these in the first slide, but the purpose of the Federal Reserve is sets interest rates, manages the money supply, regulates financial markets, and acts as a lender of last resort during periods of economic crisis. Federal Reserve consists of a federal agency and 12 privately chartered regional banks. The Federal Reserve controls interest rates in two ways. The first is open market operations. I talked about monetizing, right? Selling and purchasing of treasury bills and government securities in order to regulate Money supply in the economy when they're monetizing quantitative easing. They're adding money artificially to the money supply, uh, that it eventually is going to result in inflation, which is precisely why we are where we are right now, there was too much quantitative easing, um, due to the pandemic and, uh, now the economy got overheated. That's why we are in the situation now where they are aggressively, uh, monitoring it and trying to control it, right? That's what they were doing when they were raising the fed funds rate. Now, For the first time in a bit, they lower defense funds rate, but we're still seeing, uh, what happens when the debt settles. And the Fed funds rate again is the interest rate at which banks and other depository institutions borrow and lend excess reserves to each other, usually in an overnight basis to meet the reserve requirement. Again, Fed funds rate, as you all have seen, if you've been following all this stuff the last couple of years, that's what they've been using to control monetary policy, because it will. influence short term rates on consumer loans and credit cards and also affects the crime rate, which eventually that trickles down to all the other lending. So last, uh, so what are the macro economic factors affecting interest rates? Well, We're talking about inflation, right? So the Federal Reserve counters inflation by raising the Fed funds rate, which increases all other borrowers costs down the line. So inflation is one of the factors that we're going to be looking at that will affect interest rates. The unemployment rate is another factor that's looked at. That's the one that earlier this week resulted in. The 10 year Treasury actually tracking up instead of down because the unemployment claims report came out and actually showed a dip in unemployment claims below what was expected of. So whenever you come in lower than that number for one of the items, there would have been more unemployment claims that would have been estimated. The rationale would have been, okay, the economy slowing down. Less people have jobs because more people are filing unemployment claims. In this case, the unemployment claims declined. The rationale, whether it's true or not, is that there's less people applying for unemployment because now they're working. Now, it could be that they're no longer looking for work. But, uh, the main thing that they look at in this report is that it could be that they're just, they're working now and that's why you have less unemployment claims. And, uh, the other report that comes out that, um, shows or gives a hint that what may happen with the unemployment rate is the ADP payroll jobs report. There's usually an estimated number. If you're coming in higher than the number, that means you created more jobs. You're going to have less unemployment. You're going to have a hotter economy. You're going to have higher prices and you're going to have inflation, higher rates and vice versa. If the number comes in lower, uh, the other factor that's looked at when analyzing what's going to happen with the interest rates is gross domestic product. That's the production of our economy that determines the economy's ability to pay. and the need to borrow. So if we borrow more, the rate of the instrument that we're using to borrow, in this case, the treasury security, will need to increase because we're increasing the supply. We got to maintain the value of that instrument. So we have to increase the price. Unfortunately, that's in that, uh, I mean, you have to increase their yield, excuse me, when you increase the yield. That's the same as increasing the rate. And that's what happens. So higher GDP will keep inflation down as our need to borrow will be less lower GDP will, uh, probably, uh, increase inflation as our need to borrow will increase and other factors that we look at, uh, regarding inflation in the economy and in our production would be the consumer price index. known as CPI and the producer price index. Uh, the producer price index tends to be the one that they look at a little bit more because if the prices are going up to the producers, those increases will be passed on to the consumers and the consumer price index going up is this, you know, also obviously now it already got to the consumer prices are definitely going up. We're having inflation rates are going to go up. That's how they look at these relationships. And so now, uh, let's tie this all in together here in our last slide, right? So what exactly are going to be the effect on these interest rates that we're talking about and these factors on mortgage rates, right? Cause and effect. Well, the increase in the fed funds rate now we determine, right? That's the short term rate that borrowers charge other banks. I mean, banks charge other banks to borrow overnight. So if the, if there's an increase in the Fed funds rate by the Federal Reserve, it makes it more expensive for banks to borrow, meaning that there will be then again an increase in the mortgage rates as the cost of the bank to do business has increased. Right. So that's simple math there. They're going to raise interest rates on consumer loans and a mortgage loans. Now, when we're having capital flows in and out of the market due to all this volatility with the treasury securities, you see all of a sudden the stock market jumps up when they make an announcement or, or, or, Or tanks when they make an announcement, uh, that results in capital inflows or outflows out of stocks and out of the treasury securities as well. So like the stock market as investors position, their portfolio to edge for interest rate risk. This also affects the rates in the short term as money market fund managers need to either buy or sell treasury securities. Investors tend to park their money in a money market fund when they're waiting to invest. In this case, they may tell the fund manager, I need my money. I'm going to buy some stocks. So fund manager has to liquidate treasury securities. In order to give the money to the borrower so that then they can go and buy stocks with the funds that they have in the money market account. The money market manager selling those treasury securities now that's increasing the supply and there's a good probability now they're going to have to increase the rate on those instruments at the, at the Fed in order to have people buy them because they're selling. They're selling and whatever you're selling that drives the market down. Uh, conversely, when they are selling their stocks and they're parking their money in the money market fund, the money market manager then gets those, those that money and buys treasury securities, because that is what they use to pay the interest to the account holders in the money market fund. They use treasury security. So now they're the, there's money going into the money market. They're buying treasury securities. The, there's a decrease in supply of treasury securities, and that's going to, uh, increase the price and going to, uh, decrease the yield in the, uh, treasury security. So again, there's a inverse relationship there and understand how the capital flows in and out of markets will affect. Um, uh, the treasury securities and that effect will also then trickle down to the mortgage rates because essentially as the treasury securities increase in yield, the mortgage rates will increase in rate and especially the 10 year. So for those of you, that's the one at least that are asking, well, then, Jose, what happened in the last few days? Well, that's what happened with the 10 year. Is what I mentioned, uh, the, uh, unemployment claims report came out with less unemployment claims filed. Investors are banking on the fact that that means we're not going to have a recession. And what has occurred then is that the yield in the treasury securities has gone. And that's how they're the market is pricing now Uh, at least in the short term for no recession And the end result is that the rates instead of going down in the mortgage Uh last couple days have tracked a little bit So do follow your indexes, uh on a daily basis So you can have a good idea of when it's going to be a good moment to lock your files All right. Thank you. Jose. I don't see any questions yet, but In addition just to knowing kind of the atmosphere of locking your files, it's also, uh, can you talk about how it's important to know some of this stuff at least on a general level when you're talking to clients? Obviously you're not going to educate the client on everything, but you're going to get a lot of clients to say, wait, the, I see all over the news that rates just went down. So what happened? Right? So, so that's where this comes in. Absolutely. Because sometimes, uh, they'll have unrealistic expectations. of what's going to happen. They may be waiting for something that's not realistic, that's not going to happen. And then it's our job to empower them. I mean, we can't force them to do anything, but we can certainly empower them with the information so that they can make an educated decision on how they're going to handle the business all the way from applying now to the to letting us know, yes, they want to lock it. So that, you know, they don't point the finger at us later and say, you know, why didn't you lock in my loan? You know, so they, you have to make that clear and always ask the customer about, you know, locking it in and giving them the consultation on what's going on. So I don't see any questions. So I think we'll go ahead and wrap it up. Uh, remember that we do this at, uh, 12 PM Eastern every Tuesday, Wednesday, and Thursday. Thursday so definitely appreciate everybody tuning in. We'll have a new topic for you tomorrow So we'll see you tomorrow at 12 p. m Eastern for the next episode of the loan officer training series with the mortgage calculator. Have a great day