Fear and liquidity

Today's question from Commodore's customer base: Short term rate are very low, there is talk that the Fed may drop rates again..so why are mortgage rates staying high?

This is a question that we have been getting a lot lately. Both from clients who are looking to purchase and those looking to refi. Most people who are not in finance do not realize that interest rates in general (LIBOR, Fed funds rate, prime rate), do not always correlate with mortgage rates.

When the Fed lowers the discount rate for example, there is no mandate that dictates that mortgage rates will follow. In the current environment, lenders and both Fannie and Freddie, are very cautious about lending, and they are requiring a higher premium for the money that they do lend. So even though cheap money is available to them, they inflate their mortgage rates in order to be compensated for the perceived risk in the market place. In other words, they want more vig to cover their behinds.

In a more normal credit environment, the yield on the 10yr gov't bond is fair proxy for Freddie and Fannie rates. Today though, there is a disconnect. There is an artificial floor on rates based on fear and liquidity. Until the credit pendulum swings back the other way, rates will stay higher than they should.