Rates Drop on Fed Purchases, Rates Rise on Bank Volume

The refinance boom has been keeping the mortgage industry busy.   When the Federal Reserve started buying Mortgage Backed Securities in December, the Fannie Mae and Freddie Mac 30 year fixed rates dropped to historic levels.   When the banking community was inundated with refinance files to capacity, they acted in their own self interest and raised rates.   Why is that?

The Mortgage Backed Security (MBS) market is the driving force behind the 30 year fixed rate market and not the U.S. 10 year Note as many assume (use that as a talking point at your next cocktail party/bible meeting/group therapy).   When the demand for any bond increases, its price rises and conversely its yield (rate) drops.   By buying these MBSs, the government forced the going 30 year mortgage rates to drop, as they did in December and January.

The Federal Reserve Bank through the U.S.Treasury intended for this to stabilize the housing market by promoting cheap money for home buyers and to help current mortgage holders an opportunity to refinance from higher rate loans.   But the primary investors in these mortgages, the major banks, fired tens of thousands of employees last year.   Without the support staff available to get these loans through the pipeline, the banks found themselves swamped with business they could not handle.   What is the easiest way to curb demand for mortgages?   Raise the rates.   They may tell you that recent economic data warrants their actions, but I don™t fully buy it.

The banks and other investors need to make a premium on every loan they underwrite to make up for the awful turn in events these last few years.   That™s fine considering the risk they undertake.   It is their money, and those with the gold make the rules.   But was it not the intention of our elected officials to help the people?   Once again, the stimulus package seems to have helped the banks over the needs of the people.

This is no reason to put off a refinance (or home purchase) if the rate available to you now is much lower that the one you already have.   Waiting for the bottom could be a costly proposition as you continue to pay the higher rate while waiting to shave a quarter point which might save you a few dollars.   Rates are at historic lows.   If you can qualify for a mortgage, take advantage of this situation.   Refinance!   Buy a house!   Carpe diem!

© 2009 Michael S. Amers

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