What moves interest rates? When the Federal Reserve cuts interest rates, why don’t our rates always move in lockstep? What’s the short-term outlook for rates? These are just a few of the topics covered as NFM’s Director of Capital Markets Tom Sealock sits down with NFM TV’s Greg Sher.

Full Transcript is Below:

– Welcome in to another edition of NFM TV. I’m your host, Greg Sher, joined by the great Tom Sealock. He is the Director of Capital Markets and a 15-year veteran of this wonderful company. Tom, thanks for being with us.

– Thanks for having me.

– Thought this would be a good opportunity, given the recent rate cut, to dive into some rate talk. So let’s just start there. Rates were recently cut 25 basis points, and many borrowers were calling loan officers saying, “Hey, does this mean my rate goes down a quarter?” As you and I know, and many people know out there, it doesn’t necessarily correlate to a rate drop, tell us why. Why, when rates go down, is there not a direct effect sometimes on interest rates?

– Well, Greg, because primarily that rate cut affects short-term interest rates first. But second, it’s all dependent on what’s built into the market. So most of the market anticipating a 25 basis point rate cut or 1/4 point rate cut, if that’s built into the market, then when that is announced, nothing happens.

– No big deal.

– No big deal.

– It’s already baked into the rates.

– Baked into the rates.

– What changes is if they come out and the expectation is a 1/4 point, and then they cut 50 or further. So that’s where the expectation plays out.

– Well that’s interesting. So the market, they’ve got a lot of forecasters, so they see this coming from a mile away. So might it be smart for loan originators to contact their borrowers and let them know, “Hey, here’s what we’re expecting, “this is already built in here, I don’t foresee a change. “The only way things would change is “if there’s something beyond what’s expected,” yeah?

– Exactly.

– All right, very good. Let’s talk about indicators, free indicators, ’cause I know you can pay for services and there are also some other things out there that originators and even customers can look for that can be a tell as to where rates are headed. What’s the number one tell?

– Well, most people, the majority of originators that I know that are using a free service or looking at the U.S. 10-year treasury. And U.S. 10-year treasury, as we know it is not a direct correlation to interest rates, but it is the best indicator that’s free that will follow the long-term interest rates.

– So when the 10-year note goes down, what does that usually mean for rates?

– So when the 10-year yield drops–

– When it goes from 180 to 150, what’s that mean?

– So what we see is, on the mortgage-backed security side, we see that rally, so we see prices get better on the mortgage-backed security side–

– So rates get better?

– Rates get better.

– Okay, let’s throw up a chart right now and take a look at this, because this will give people an idea of what to look at. Right now, we’re looking at a 10-year Treasury chart. We’re also looking at a 12-month MBS chart, Tom. Just walk us through what each means and how they correlate to one another.

– [Tom] Sure, so the U.S. 10-Year Treasury, as you see, as we explained, the yield has gone down, so this is looking 12 months back. And you’ll see that, for the last 12 months, we’ve seen, essentially, interest rates get better. So as an originator, if I’m looking at this chart and I’m looking at, let’s say today, it shows a 175, well, if that drops down to 150, I would expect that interest rates should get better. Now, the 10 Year Treasury is not what investors and what NFM uses to drive our interest rates. What we use is mortgage backed securities.

– [Greg] All right, so we’re looking at that now. It’s a 12-month MBS chart, so that’s the acronym for mortgage backed securities and tell us how we follow this chart and what it means for rates usually.

– [Tom] So the MBS chart is essentially showing you, this example is a Fannie Mae, three coupons. So what that’s showing you, is over the last 12 months, we’ve seen the prices go from a lower level, and rally to much higher levels. And so this chart will be the exact opposite of what the-10 year looks like, but essentially rates are improving.

– [Greg] So if the MBS is heading up, that’s better for interest rates as is, if the 10-year Treasury is moving down, right?

– [Tom] Exactly.

– All right, appreciate you telling us that. Now, we’re back on camera again. Tom, tell us about the crystal ball that you see, this is the toughest question, right. It’s a maybe even a harder job than a weatherman, predicting a future forecast. What do you think is gonna happen here moving forward?

– I would say that there are certain headlines that I’m looking at first. I’m leaning towards a rally, slight rally through the end of the year. What I’m looking at though, are headlines that might contradict that. And what that would be is, the Brexit headlines that are coming soon. The political headlines we see as far as impeachment, and those things.

– Those typically drive rates down or up? Lots of political chaos is that good or bad for rates?

– I would say volatility on that side, it typically benefits us. But where it would benefit us the most, and it’s unfortunate that it takes these kinds of headlines, but on the tariff side, where we have tariffs hitting China and other countries. Those headlines would further weaken our global economic–

– Okay, make sense. So if China and the U.S. strike a deal, and they lift the tariffs that could be bad for rates?

– That could be bad for rates.

– Something to look for, okay. Lastly, let’s show up this visual here of an email that you send out throughout the day. When there’s negative price pressure, you let everybody know, what exactly are we looking at here? What does this mean? Should loan officers run to lock? How often after you send one of these, do rates get worse?

– [Tom] Well, what we try do is, we send out the MBS chart, so this is the chart we’re using to set price. So we put targets on that chart, so that you can see if the market moves in this direction, we may see a reprice. And so what we try to do is, we get ahead of it. So when we see negative market pressure, we’ll typically put that out when we see that trend. And sometimes we’re already in that repriced territory, but we’ll try to give you a heads up. And I’d say on average, we probably put it out an hour to two hours before we would negative reprice, if it stays in those low.

– Well, that’s so powerful, so if you see a negative price pressure email come out. Let’s say you’re a loan officer, your advice would be to do what?

– I would lock, I mean, we always recommend the lock up front.

– Yeah, but if you happen to not be locked, and you’re–

– But if you haven’t locked a loan, and you need to get it locked. When you see that email, we would recommend just getting it locked.

– Wow, such valuable insight, Tom Sealock, thank you so much. Really appreciate your time.

– Thank you.

– That’s Tom Sealock, he’s the Director of Capital Markets.

– I’m Greg Sher from NFM TV, we’ll see you next time.