A Broken Market Is Causing Mortgage Rates to Surge

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

You know, Joe, we've been talking a lot about what higher interest rates mean for the housing market. And we had that really good episode with Morgan Stanley's housing strategist, Jim Egan. He walked us through a lot of the technicalities of the impact of higher rates on house prices.

But I think we could get even more detailed.

Joe Weisenthal (0:37)

Well, absolutely, because we talked about what is the impact of higher rates on housing, but we didn't really talk about why have rates gone so much higher. And this is all I know about housing finance.

I know the government backstops a lot of, or implicitly or explicitly, actually I'm not even sure anymore, but backstops a lot of-

Tracy Alloway (0:55)

It does, it does. Even more.

Joe Weisenthal (0:58)

And so you start with the sort of risk-free rate on treasuries, because it's government, and then you add some spread, and that's the average more, and then I don't know anything beyond that.

Tracy Alloway (1:09)

Well, that's a fair question, though. Where does that spread come from? Why do people make additional money, or why do they demand an additional premium for investing that's in something that has a guarantee from the US government?

Joe Weisenthal (1:22)

Yeah, exactly right. This is the part I don't understand. Like, if the asset is backed by the US government, why don't we get mortgages the same rate as treasuries? But it's not, because right now a 30-year treasury is somewhere around 4%, and a 30-year mortgage is around 7%.

And that spread varies quite a bit from time to time. So even as recently as last spring, the gap between a mortgage and a treasury had gotten down to less than 1%. Now it's around 3%. Where does that spread come from, and why does it change over time, are two things I just don't know the answer to.

Tracy Alloway (1:53)

Right, well, also that 3% spread is, like, at the highest that it's been, I think, of all time. So, like, something is happening in the market right now that is different to the way it used to work. And I think we need to dig into that. You know, we spoke a little bit with Jim about it, but we really need an expert. And I got to say, I was sort of baited by, there was a tweet recently.

It started with, I'm not about to go on a podcast to explain why, but this year has likely broken the market for mortgage-backed securities.

Joe Weisenthal (2:21)

That was a dare to us. It was like, if it's like, you're now just like, I'm not gonna go on a podcast. It's like, all right, let's try it. Let's see. Let's see if you can resist.

Tracy Alloway (2:28)

Okay, well, here is the podcast to explain why the MBS market seems to be broken. We are going to be speaking with really the perfect guest. We have Guillermo Roditi Dominguez. He is the managing director at New River Investments. And he is going to explain all of this to us in detail.

Joe Weisenthal (2:45)

One of our super fans, I think.

Tracy Alloway (2:47)

Oh, really?

Joe Weisenthal (2:47)

I think so. He's one of the first to tweet them often. So, and we've known him a long time. So very excited about this conversation.

Tracy Alloway (2:53)

So maybe it wasn't a dare. Maybe it was, you know, please pick me for the podcast. Guillermo, we are delighted to have you on and really looking forward to the conversation.

Guillermo Roditi Dominguez (3:01)

I am very, very, very happy to be on. It's a bucket list item for me. And, you know, I do stay up until very late at night so I can listen to, you know, Odd Lots and tweet out my notes before anybody else wakes up.

Tracy Alloway (3:15)

I love that. That makes me happy.

So why don't we start out with, here's a very simple premise. Is the current moment in the mortgage market? And, you know, when I say the mortgage market, I'm kind of talking about mortgage-backed securities, AKA MBS. A lot of people will think back to, you know, pre-2008 times and think of them in that context. But is this particular moment in the mortgage market different or remarkable in some way? Like, can you give us some historical context around what we're seeing right now?

Guillermo Roditi Dominguez (3:46)

Yes. So this moment is special because it's not happening because people are afraid people are not going to pay their mortgage. This is done because people are afraid house prices are going to go down.