Last Week in Review: Liquidity Defined
This past week, thanks to the Federal Reserve, home loan rates declined. The high uncertainty around the coronavirus and its impact on homeowners and mortgage payments created a dire need for liquidity in the mortgage-backed security (MBS) market.
This is where the Fed came to the rescue by providing liquidity.
What is liquidity?
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words, it's the ease of converting it to cash.
Last Sunday, the Fed announced that it would purchase an unlimited amount of MBS in order to provide the much-needed liquidity to get the MBS market to perform correctly.
As a result, MBS prices showed more normal trading activity which resulted in lower rates and more stable pricing this week.
We expect more stabilization in the days and weeks to come as the Fed is committed to getting the MBS market to function as normal.
Bottom line: the Fed's unlimited MBS buying doesn't mean home loan rates are going to improve much further, but it will rather stabilize the market and keep rates near current levels, affording homeowners the ability to refinance and secure a low home loan rate.
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