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Why Mortgage Rates Haven’t Fallen As Expected

2008
10.31

When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.

For a brief two-week stint, they were right — post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.

Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels.

Now, this isn’t to say that the nationalization was a failure — far from it. The government’s takeover of Fannie Mae and Freddie Mac accomplished two very important goals:

  1. It restored failing confidence in the U.S. mortgage markets
  2. It opened legislative channels for faster, more relevant housing reform

And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.

The biggest reason why rates are higher is because of Wall Street’s manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it’s not what the Treasury expected.

See, when the takeover was first announced, mortgage-backed bonds were elevated to “government status”. This created new demand for mortgage bonds which helped to push down rates. But, in the weeks that followed, the world’s credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.

That’s a combination that only U.S. treasuries can provide. Versus “true” government bonds, mortgage-backed securities are just quasi.

We can’t know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach. Until credit order is restored globally, expect volatility to continue and rates to remain up.

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