Will Mortgage Rates Go Lower

I have received many calls today from agents and consumers alike who are hearing news reports of fixed rate mortgages being reduced by the government to 4.5%. While rates are very, very low right now, they are not at the 4.5% level. More importantly, they may or may not be headed in that direction. As you are aware, interest rates are driven by market forces and respond to bond market issues in response to daily eco­nomic news and, occasionally, whims. The government does not “set” the interest rates. Accordingly, this news story is not factually accurate. Having said this, could there be days in the coming weeks or months that we have ac­cess to interest rates at these levels? Yes, this is possible. However, it is far from cer­tain and should, therefore, be considered with great caution. It is important that con­sumers understand that current interest rates are in the low to mid 5’s which is histori­cally extremely low. A client who chooses to wait on his/her buying decision until rates hit “bottom” will likely end up missing the great opportunities of today…and miss the bottom as well. History has taught us that the bottom typically lasts for a period of hours, not days, and is quite elusive. Please read the opinion of the mortgage analyst below. Larry Baer does a wonderful job of explaining the discrepancies between the news media and the markets. As he says: “The markets are always right. You and I are some of the time.” I think most readers would agree there is a big difference between talking the talk - and actually walking the walk. The Wall Street Journal and Reuters News Service really got the rumor mills buzzing yesterday when they claimed their "sources" within the U.S. Treasury Department are whispering insider knowledge that indicates the government is considering reducing residential mortgage rates to 4.5% by upping investment in mortgage-backed securities. The plan would be for Fannie Mae and Freddie Mac to buy up more mortgage-backed securities to help drive borrowing costs roughly 1.0% lower than last week's U.S. average of 5.53% for a 30-year fixed mortgage. I certainly don't want to rain on anybody's parade here - but there are a couple of things I think you ought to consider in order to put this story into perspective. The Treasury Department already has authority to buy billions of dollars of mortgage-backed securities - it has yet to use that authority to any large degree. Does additional purchase authority suddenly create a storm of mortgage-backed security purchase ac­tivity that didn't exist before? How much additional buying power is necessary to push 30-year fixed-rate mortgage-backed securities down to 4.5%? The Federal Reserve announced plans to buy $500 billion of mortgage-backed securities from Fannie and Freddie on Monday - which did cause rates to spike lower - for a couple of hours - be­fore mortgage interest rates finished flat to slightly higher through this morning. As I write, 30-year fixed rate mortgages in most of the country are trading at or near levels last experienced in June 2003 - when they touched 5.25%. It is unlikely any co­ordinated effort by the government to push 30-year mortgage interest rates to 4.5% or lower will occur until at least January 20th - there's probably too much "political hay" to be made by the majority party to make this event happen any earlier. Last but not lest, in my 30-years of managing mortgage market risk on a daily basis I've never seen mortgage interest rates sustain a dramatic move to lower levels when Uncle Sam is dumping huge amounts of supply into the credit markets. Current esti­mates indicate Uncle Sam has an immediate borrowing need that is multiples of his previous all-time record. So in a nutshell, we're talking about a program that doesn't even exist, that has no qualifying parameters, no timeline for implementation if it actually takes form and that will - at best - offer a note rate that is roughly 50 basis-points less than is immediately available in the market today. I hate these "two in the bush versus one in the hand" dilemmas - don't you? Shifting gears a little bit, I want to remind you that the economic "biggie" of the week is on tap tomorrow morning at 8:30 a.m. ET. The employment report is expected to show the economy shed 320,000 jobs in November, accelerating the labor market decline from the 240,000 jobs lost in October. In my judgment a dismal nonfarm payroll report is already priced into the mortgage market. As desensitized as mortgage investors have become to miserable macro-economic data it will likely take a November job loss figure greater than 350,000 and/or a national jobless rate higher than 6.9% to support a rally in the mortgage market. Numbers that match the consensus estimates for the November nonfarm payroll data will likely have little, if any significant impact on the near-term direction of mortgage interest rates. The above article was contributed by Tish Ashley of The Funding Source