Why Mortgage Rates Dropped Slightly Today, And Why They Won’t Stay Down Much Longer

by Florida's #1 Mortgage Planner on March 18, 2009

No doubt, unless you are a hermit, you have heard the media talk about mortgage rates heading for 4%.  Heck, even Jim Cramer, you know that “Mad Money” guy on CNBC, was praising Ben Bernanke for making this move today and even saying he just gave us 4% mortgage rates.  Of course, John Stewart (Daily Show on Comedy Central) showed just how good Jim Cramer is, and it makes you wonder just how much he knows about the markets and how mortgage rates are derived.

So, just why is everyone in the media talking about 4% mortgage rates again?

Well, it all comes down to the Fed’s Policy Statement and not just their rate decision.  Sure, the Fed kept the Fed Funds Rate at 0-0.25%, but statements released were what really is driving the markets nuts today.  Let’s take a moment and dissect it…

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending (no arguments there).  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment (reduced inventories help spark inflation).  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth (and what about inflation when this happens?).

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued (big gamble).  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term (CPI showed deflation is not an issue).

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability (this has been repeated time and again).  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period (until America decides it’s OK to increase their debt loads again).  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion (here is why mortgage rates are dropping today – market manipulation)Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months (wow, the governmentis even manipulating their own debt market).  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility (yet another bailout program) to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets (they will probably even except excrement as collateral so they can give away money).  The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

OK, am I being harsh?  Maybe. Reality will show a different picture, one that has all of this Fed purchasing of mortgage backed securities as only keeping mortgage rates steady, just as they have been.  What I read into this, and maybe I am wrong, is that the Fed knows market pressures are going to increase and want to drive mortgage rates higher, and do so for a long time.  As a result, they will need far more than the original $500 billion in market manipulation to prevent the mortgage rate bubble from bursting too soon.  Do to other market forces and the way mortgage rates are derived, mortgage rates are not likely to drop much, nor will they likely stay low for an extended period of time.

Yes, the mortgage rate bubble I have talked about before is likely seeing more “air” being pushed into it.  As the government spending spree continues, along with the “gradual” return of the economy, the mortgage rate bubble will burst as artificially inflated markets do.  One need to look no further than the housing market to see this fact, as it was artificially inflated interestingly enough by the government, namely Barney Frank and Christopher Dodd.  Are you going to believe that the Fed’s market manipulation of MBS is not going to result in a bubble burst?  We can only hope that the Fed will make a pinhole and let the air out gently, but with a bubble as big as $1.25 trillion, even a pinhole is likely to create a big bang.

Leave a Comment