Mortgage Rates and the Fed - Get it Straight !

RE:Mortgage Rates and the Fed - Get it Straight !

Dave — Wed, 19 Mar 2008 11:00:00 GMT

Instead of being sarcastic and condescending, why not simply provide some information? One has to read through numerous paragraphs of self-aggrandizing nonsense in order to get to the point. Get over yourself, dude!f

RE:Mortgage Rates and the Fed - Get it Straight !

marc — Tue, 18 Mar 2008 11:00:00 GMT

This is a good article, however it along with many articles by all the other reporter pretending to be economists fails to discuss what will result in a reduction in mortgage rates - 1) A sales price and inventory bottom 2) If the Fed funds rate and US Government Treasury bond yields continue on a downward path they will continue to lower returns on almost all types of investment to the point where the investments don't provide a real return at all - suddenly mortgage securities will become attractive at a couple percent over other investments - the safety of government bonds will be outweighed by the fact that its impossible to earn a real return without risk - properly documented loans with 10-20% loan to value are a great investment.

RE:Mortgage Rates and the Fed - Get it Straight !

Guillaume — Fri, 14 Mar 2008 11:00:00 GMT

So, home value is going down... because people don't buy, because of hight interest rates. Those who own a house can't pay it because of even higher rates they signed for at the time, so it is more homes for sale on the market (foreclosures). The fed is lowering its rate so money is cheaper for consumers, but the intermediary (banks) doesn't play the game and instead make more profits to cover their own past mistakes of policy. They drain the whole system. Why buying a house is risky now? I think the prices of houses can only go up, maybe not in the short term but it is garanteed on the long term, history has always proved it. So it is the right time to buy, not risky. Banks are so used to making huge profits that they don't want to take any risk so they don't invest in the futur. Instead of lying to people pretending their rates are linked to the fed's rate and actually not showing it (how can you trust them after that?) banks should think about the important role they have in boosting economy and not always make profit on the back of the people. When you squeeze a lemon, after a while there is nothing to squeeze anymore, they are just ruining the system for their own profit. Sure my analysis is not very economic but I hope to think it is logical...

RE:Mortgage Rates and the Fed - Get it Straight !

joe — Thu, 06 Mar 2008 13:00:00 GMT

Ok, Ok, Ok, I get it, you get it, we get it, but does the Fed get it? Apparently not. I commend all of you for your expertise. Just reading all this made my head hurt! All of you seem like many others, they know what the problem is and can point it out. BUT HOW DO WE FIX IT????????

RE:Mortgage Rates and the Fed - Get it Straight !

laughing out loud — Wed, 05 Mar 2008 13:00:00 GMT

Matthew, once again another fine post. Many of us here may or may not understand the dynamics of how rates fluctuate based on the markets, but I think you clearly explained it in a simplistic manner. While Steven does point out some of the additional underlying factors, his post does not hammer home the basic principles. Apparently his mouth mouth IS not as big as yours.

RE:Mortgage Rates and the Fed - Get it Straight !

JTG — Mon, 03 Mar 2008 13:00:00 GMT

I'm a novice to this so forgive my lack of knowledge of this subject. Does this mean that when the Feds meet mid March the mortgage interest rates may not change or can even rise due to the MBS? I am refinancing a loan and they want me to lock in at 6%. I wanted to wait to see what the Feds do. Does that make sense?

RE:Mortgage Rates and the Fed - Get it Straight !

Darren — Mon, 03 Mar 2008 13:00:00 GMT

I agree but why do banks and lending institutions use Fed rate cuts in their advertising intentionally misleading the public into believing that it is relevant while simultaneously raising interest rates during an advertised Fed rate cut?

RE:Mortgage Rates and the Fed - Get it Straight !

Charlie — Sat, 01 Mar 2008 13:00:00 GMT

Matthew gave the correct basic fundamental reason for the rise in mortgage rates. It is shocking how few financial journalists and, Yikes, members of the House Financial Svcs Committee, and, Yikes, even worse, Big Ben himself don't understand this basic fact. Or maybe Benny didn't want to clue the Distinguished Gentlemen in that the reductions in Fed Funds rate is responsible for the inflation eroding the MBS.

RE:Mortgage Rates and the Fed - Get it Straight !

davos — Sat, 01 Mar 2008 13:00:00 GMT

Hello Matthew: I could not agree with you more! I'm not going to split hairs about MBS's. Your point is that the short term really has little impact on the long term. Further: The "Fed" isn't federal in any way shape or form, it has NO governmental/Congressional oversight. Each time it prints money our dollar is devalued. According to our Constitution the dollar was to be of silver and or gold - Nixon declared bankruptcy and took our dollar off the gold standard. It appears to me that the current and past Fed chairman seem hell bent on tanking the dollar. I personally feel that soon the dollar won't be accepted for gold, oil and other commodities. When these greenbacks come back home to roost I think we will see 1930 all over again. As far as the FDIC goes, last I heard it can insure/cover the loss of one or two good sized bank failures. Personally I think that our banking system is going to fail and if the Fed bails them out then our dollar will fail. Either way I see a bleak Enronish picture. I also find it pathetic that all we hear from W is that we have a strong dollar policy. If anyone thinks 1.51 is strong then I'd hate to see what they think weak is! Way to go Fed, the rest of the banks, Congress!

RE:Mortgage Rates and the Fed - Get it Straight !

Larry — Fri, 29 Feb 2008 13:00:00 GMT

Matthew, while Steven has some good points, you are essentially correct. When the Fed lowers the Prime Rate we should expect to see the stock market rally and money be pulled out of bonds and spent on stocks. I also was amazed at the question when I saw it yesterday AM. What was the most unsettling was that an informed elected official, who has control over our careers, was unaware that there was not a direct correlation between the Prime rate and long term mortgage rates. If there is this little understanding of the how mortgage rates are derived, how can there truly be understanding of the proper use of Yield Spread or Stated Income? Or even of how a Rate Sheet is composed...

RE:Mortgage Rates and the Fed - Get it Straight !

Matthew Graham — Fri, 29 Feb 2008 13:00:00 GMT

Dear Steve, Thank you for illustrating my point with such uncanny irony. Just like the news media or a legislator, you have delivered a somewhat caustic opinion on a subject about which your appear to have more to learn (as do we all!). I hope we can have a discourse at some point where any of our legitimate shortcomings of knowledge (and I'll freely admit mine) are addressed and corrected by the other. We should end up, both of us, better off for the experience (although my voice might be a bit hoarse and your ears a bit tired). You know where to find me!

RE:Mortgage Rates and the Fed - Get it Straight !

Steve — Fri, 29 Feb 2008 13:00:00 GMT

And I thought the President waived his magic wand and set mortgage interest rates! He's in charge of the economy, right? ,>

RE:Mortgage Rates and the Fed - Get it Straight !

Steven — Thu, 28 Feb 2008 13:00:00 GMT

Dear Matthew, Your lack of understanding of macroeconomics and (mortgage) interest rates is only matched by the size of your big mouth. MBS (bonds) are bought and sold based on thier risk plus the prevailing Fed (risk free) rates and are not tied tightly to the interest rate of the underlying security. MBS-bonds that are low quality-risky are sold at huge discount regardless of anything else. The investors buy these at a premium or discount, of the stated interest rate based on thier perceived risks. The problem with mortgage interest rates is first off supply and demand. The decrease in the number of lenders and the decrease in the amount of money available to be put in to the mortgage market has allowed the price, or interest rate, to remain high, relative to the past 5 years. Or you can say the spread between mortgage rates and the fed rate is high, relative to the past 5 years. So, the first problem is money supply. This the credit crunch. Banks are so busy taking what ever cash they get and setting the cash a side to cover sub-prime losses that they do not have money to lend out. A lot of banks have no choice, or risk being siezed and liquidated by the FDIC. The second problem is risk. This is emphasized by the fact that banks do make their own mortgage interest rates. Homes are the underlying collateral for the mortgage loans, for banks, and home values are decreasing. This requires a greater interest rate (risk) premium. If your collateral is decreasing in value and you do not know where the bottom of the collateral's value is, you have a risky security no matter what it is. This is why the aformentioned spread is historically high. Deflating home values are not typical to the mortgage market. That is the demand problem. No one is looking to buy collatreal that is decreasing in value. The continued lack of buying increases the devaluation of the collateral making mortgage lending look riskier and riskier the further out in time you forecast. Your over analysis ignored the fundamentals which you can never do. That is, that mortgage money supply is tighter than ever, bar maybe the great depression, and that mortgage collateral (homes) is more risky than ever before, again probably since the great depression. Mortgage interest rates are going to remain high (sticky) as long as these 2 basic fundamental market problems exist.