Why are Mortgage Rates Rising?

I am getting calls every single day about the interest rates. Consumers are really confused right now because they are hearing “The Fed just cuts rates!” and then when they call a loan officer they hear “Wow, rates are going up!” How can rates go up if the Fed is cutting them?!?!?The first thing that you have to understand is that the rates the Fed controls are totally different from mortgage rates. The Federal Reserve has absolutely no control over the residential mortgage rates. Mortgage rates are controlled by the secondary market where mortgage backed securities are bought and sold. This market is independent from any government agency and goes up and down daily just like the stock market.

The second thing we need to understand is what effects this market and causes mortgage rates to go up. This market works just like the stock market when it comes to price changes. The people buying the securities decide how much they are willing to pay based on economic indicators, gut feelings, public perception, etc. It is not an exact science because human beings are involved, but it typically makes sense. When MBS (mortgage backed securities) prices go up our rates improve (YIPPEE!!) and when they go down, our rates get worse (YUCK!)

Right now the problem is that the entire industry is seeing more negative results than in past years. There are more foreclosures, more early payment defaults, etc. The investors that buy MBS’s are a little worried about all the risk and that is pushing our rates higher.

Imagine the levies in New Orleans, when Katrina came through the levies were overwhelmed because they were only built to withstand a certain amount of surge. Our secondary mortgage market was built to withstand a certain amount of surge (bad loans, foreclosures, etc), but then the sub-prime era hit and like Katrina the levies could not hold. There have been too many problems for our system to withstand and now we are experiencing the flood waters.

The good news is that our levies are a little better than the ones in New Orleans, and it shouldn’t take but a couple years to repair the damages. We are already over a year into this, so most analysts are predicting the real estate and mortgage markets to be somewhat back to normal by mid-2009.