Why Haven’t Mortgage Rates Dropped?

Posted by Jeff on December 23, 2008 under Mortgage Info | Be the First to Comment

The Federal Reserve cut the Discount Rate but mortgage rates have barely improved.  The truth is the Fed has no control over mortgage rates.  Mortgage rates are a function of the bond market and fluctuate just like stock prices.  As investors buy and sell bonds, mortgage rates will change accordingly.  Sometimes they will change 2 or 3 times in a single day if the market is particularly active.

Investors are still worried about the safety of mortgage bonds so more investor money is going into government backed treasury bills and treasury bonds.  There is currently about a 300 basis point spread between the rate of 10 year treasury bills and the rate of mortgage backed securities.  Normally this spread is about 150 basis points so the difference we are seeing today is evidence of investor fear.

Until stability returns to the housing market and investor confidence improves regarding mortgage backed securities, the Fed will be hard pressed to coax mortgage rates lower.