What Does the Crisis In Ukraine Have to Do With Mortgage Rates in America?

Believe it or not, mortgage rates will almost certainly decline if Russia chooses to invade Ukraine.

Apr 15, 2014 at 6:41PM

Russian military vehicles on parade in 2010. Source: Wikimedia Commons.

Earlier this week, I came across the following headline: "Mortgage Rates Hold Ground After Ukraine Headlines."

The point of the piece, as the title suggests, was to highlight the paradox that mortgage rates hardly moved today despite reports that Russian troops had crossed the border into Ukraine.

To mortgage professionals and bond traders, this makes sense. Of course mortgage rates would head lower if Russian tanks rolled across the border with Ukraine!

But is it really so obvious? I mean, think about it. Why are mortgage rates tied to otherwise irrelevant geopolitical positioning in Eastern Europe? More specifically, what serves as the transmission device to connect them?

The answer to this requires that we weave together three different things.

First, mortgage rates aren't set by banks; they're set in the bond market -- or, more formally, the market for fixed-income securities.

As you may recall from the financial crisis, once a mortgage is underwritten, it's typically packaged with other home loans into a "mortgage-backed security," which is then sold to institutional investors like insurance companies, pension funds, and university endowments.


Moreover, because almost all newly issued mortgage-backed securities these days are insured by Fannie Mae or Freddie Mac -- in industry lexicon, these are known as "agency" securities -- they carry the same risk as a bond issued by the federal government itself.

In other words, if you have a lot of money to invest but don't want to risk the principal, then an agency mortgage-backed security is a great vehicle to consider.

This brings us to the second thing. In the face of unrest -- be it economic, political, environmental, military, or whatever -- investors have a tendency to abandon risky assets in favor of safe ones.

And what's safer than an agency MBS? Answer: nothing. As a result, when events cause investors to get nervous, they substitute out of things like equities, causing stock prices to fall, and into Treasury bonds and agency MBSes, causing their prices to rise.

We've now arrived at the third and final piece to this puzzle -- that is, the relationship between the price of fixed-income securities like agency MBSes and their yield or interest rate.

Although it seems counterintuitive at first, the price of a fixed-income security and its yield is inversely related. Dig a little deeper, however, and this makes sense. If a $100 bond pays $2 a year in interest, its yield is 2% ($2/$100). But if investors bid the price of that bond up to $150, its yield drops to 1.33% ($2/$150).

And don't forget that the interest rate an MBS pays relates back to the actual mortgages contained therein.

So, to tie everything together: Mortgage rates are set by the price, and thus yield, of mortgage-backed securities. The price of mortgage-backed securities, and particularly those issued by Fannie Mae or Freddie Mac, is a function of market risk -- the higher the risk, the higher the price.

Consequently, because a Russian invasion of Ukraine would be perceived by market participants to increase risk, it would drive the price of mortgage-backed securities higher. And because these prices are inversely correlated to yield, it follows that the interest rate on new mortgages would move lower.

Make sense? I'll be the first to admit, this isn't obvious from the outset. Yet at the same time, while Wall Street may prefer that you think otherwise, this is far from rocket science.

3 stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers