Why Mortgage Interest Rates Are Rising Despite Government Actions!
Interest-Rates / Credit Crisis 2008 Oct 17, 2008 - 07:36 AM GMT
Mike Larson writes: The government is throwing everything … and I do mean EVERYTHING … at the credit and mortgage markets.
It has taken over Fannie Mae and Freddie Mac.
It has agreed to buy Mortgage Backed Securities (MBS) in the open market.
It has pledged to take hundreds of billions of dollars in crummy assets from the nation's major financial firms.
And it has promised to infuse the banking system with as much as $250 billion in capital.
The primary goal of all these bailout efforts: To lower the financing costs associated with home purchases.
But the result of all these efforts is that mortgage rates are going up.
Yes, I said UP. Let me explain …
Bond Investors Are Asking:“What Price, Bailouts?”
The 30-year fixed mortgage is America's bread and butter loan. Long before the industry thought up new and creative ways for borrowers to bury themselves in horrid loans, it's what home buyers typically used to purchase a home. And it's what I believe both borrowers and lenders are returning to because of the safety and stability that a long-term, fixed rate mortgage provides.
But rates on 30-year fixed loans aren't going down. They're going up.
The average 30-year rate jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%), itself the highest in more than a year.
How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets?
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| Washington's best efforts have not been enough to prop up the housing market or keep mortgage rates low. |
Because bond investors are dumping the heck out of bonds — and when bond PRICES fall, bond YIELDS (interest rates) rise.
Why are investors selling bonds? Well, we just learned that the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country .
Thanks to all the fresh bailout programs, the deficit will likely surge by a few hundred billion MORE dollars in fiscal 2009 — and it could easily top $1 TRILLION.
But no one in Washington has shown any willingness to raise taxes to pay for all of these bailout programs. And it's not like there's a pile of money just sitting around in the U.S. Treasury to fund them, either.
We're a net debtor nation, and we're going to have to borrow hundreds of billions of dollars to make good on all of our promises.
That means a flood of Treasury debt the likes of which we've never seen is going to wash over the market in the coming year or two.
Bond traders know that will overwhelm bond demand. So they're not sticking around. They're selling the heck out of bonds NOW , driving prices down and rates up.
Long bond futures plunged from an intraday high of 124 23/32 in mid-September to around 114 now — a decline of more than ten points in price.
Since bond yields move in the opposite direction of prices, they're going up. The benchmark 10-year Treasury Note now yields about 4%, up from the 3.4% area in September.
Look, politicians and policymakers would like you to think they can just wave a magic wand, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2003-2007.
But they can't. The bond market is pushing back and saying loud and clear: “There is no such thing as a free lunch.”
My bottom line message hasn't changed, either. I continue to expect any recovery in the housing and credit markets to take a long time. And I continue to believe that while all of these government bailout programs can treat some of the downturn's symptoms, they can't cure the underlying disease. The only real cures are time and price changes.
Until next time,
Mike
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