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Here’s what we’ve got for you today:

1. What You Need to Know About The Debt Ceiling and Mortgage Rates

2. Beyoncé and Jay-Z’s $200M Purchase: By the Numbers 💰

By the way, this article on Opt-Out Prescreen is the most clicked link in this newsletter, you should check it out if you are interested.

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Nuwave Rates Today 📈

What You Need to Know About the Debt Ceiling and Mortgage Rates

Yesterday (5.24) the bond market, once again, took a huge blow - dropping over 50bps throughout the day.

As a result, mortgage rates continued to climb all the way up to 7.25%.

So…what happened? 

A couple of things we will cover:

1. Fed minutes posted from May meeting

2. Debt Ceiling negotiation pressures

FED Minutes were negative overall

The FED released the internal minutes from the May meeting. Here were the highlights:

• Rates will be higher for longer

• No cuts in interest rates through January 2024

• CRE loan growth has slowed

• Residential & CRE values remain elevated

• Inflation is still unexpectedly high

Interestingly enough, as we said in our previous edition, many market experts still have rate cuts earmarked for as early as November…so someone is wrong.

With these minutes, the market priced in this new expectation of high rates through January - which is why we saw mortgage rates revert back to elevated levels.

Debt Ceiling Negotiations have no end in sight

I’m positive you have heard or seen news articles about the “debt ceiling”. It is causing mass panic in the market…as it should.

If you do not know what the debt ceiling even is - here is a great explanation.

To be clear for everyone - the US is not going to default on its debt. If the US Treasury does not pay the interest on their debt the entire world economy will collapse. That is not hyperbole.

What would happen before that would be Social Security payments not being made, federal programs not receiving funding, etc.

In order for the debt ceiling to be raised, it must be voted on in Congress - and this is where the lockup is occurring.

So what is the hold-up?

Here are the demands of House Speaker Kevin McCarthy before they will raise the debt ceiling:

Why is this affecting mortgage rates?

Mortgage companies and Wall St (who buys the mortgage-backed securities) operate their entire companies off risk. Risk determines your interest rate, how much money you can get, and who can get loans. Risk is all that matters to these companies.

While the risk of default is extremely low…it’s not zero.

The uncertainty mortgage companies have of these negotiations - specifically how long House Republicans will hold out, is enough for them to jack up rates until the dust settles.

This is why we have seen such a swing upward in the last week.

What should we see moving forward?

Janet Yellen believes the US could be out of money as early as June 1st. With quarterly tax payments coming in around the same time, that could push us out until at least mid-June before a default is on the table.

Therefore, we still have room to run with these negotiations.

I would expect rates to come back down under 7% once the debt ceiling is raised - my prediction is around June 6th.

(I just sang “Ceiling going upppp…on a Tuesday” in my head 😂…am i ok?)

How can you communicate with your buyers out looking?

For my buyers out looking right now - I am presenting the option to float their interest rate. If they plan on closing around the end of June or early July, there is reason to believe rates will be lower then than they are now.

“Floating” a rate means that you do not lock your interest rate in and you are subject to the market rate. You can float the right throughout the appraisal and underwriting process and “lock-in” the rate in as you approach closing.

The risk in this, obviously, is that rates continue to climb. But, the benefit would be a major correction in interest rates post-negotiation.

I would only suggest doing this if you trust your loan officer and they are actually paying attention to the market (or reading MF Lending 🪩).

If a client is with a big box company like Rocket Mortgage…don’t float. And also call us because they will get a much better rate.

TLDR

The Federal Reserve released minutes planning to keep interest rates higher through Jan ‘24.

The US debt ceiling is still not raised, which is causing uncertainty in the market and leading to higher mortgage rates.

Mortgage rates are expected to come down once the debt ceiling is raised, but it is unclear when that will happen.

If Beyoncé and Jay-Z were my buyers…

Beyonce and Jay-Z made history by purchasing the most expensive home in California for $200M.

For giggles, I decided to price out a quick mortgage calculator for them.

With 20% down (so they can avoid PMI of course) Jay-Z and Beyonce will be bringing about $40M to the table.

Their annual taxes are estimated at 164k and they enjoy a cool $1.25M mortgage payment on their 30-yr fixed rate loan.

But with a bidding war ensuing…J&B decided to go all cash to make their offer a little stronger - and they got it!! 🎉

Agents enjoy a $6M commission on that bad boy…😎

Is there a bigger power couple ever? Let me know in the comments…

The Cul-de-Sac

Thanks for reading - that is all we have for today 😎

Please forward this to your friends and colleagues if you found it valuable.

— Michael F DiLucchio