In my last post, I talked about Why ARM Mortgage Rates are High even though standard measures (a steep yield curve) suggest that ARM rates should be lower.  This divergence is a result of the sub-prime crisis.

Basically, Mortgage Rates and the 10Y Treasury Rates have diverged considerably since July 2007 due to the sub-prime fall-out.  You can see this divergence on the graph below which measures the difference in spread between Mortgage and Treasury Rates.  Lately, the sub-prime fall-out and the market volatility has been even more extreme (the spread) due to continued credit and liquidity concerns around mortgages.  It is the credit and liquidity risk that has caused the divergent paths between the 30 Yr Fixed Conforming Mortgage Rate and the 10 Year Treasury Rate. 

But how might this affect ARM or Fixed Rate mortgage pricing?

In the secondary mortgage market, we have more sellers than buyers.  Why so few buyers? Because of the credit and liquidity concerns around mortgages.  Buyers have been burned once and there still is no end to the falling housing markets, so buyers are hesitant to re-entry the secondary mortgage market. This selling bias puts pressure on mortgages, forcing mortgage prices lower and in-turn causes their rates to trend higher in order to sell those mortgages.  The usual buyers of mortgages aren't buying or are buying other investments at cheaper prices.  When credit and liquidity concerns improve, I would look for rates to fall.  But, don't count on this to happen for quite a while.

30 Year Conforming Fixed vs. 10 Year Treasury

Also Read:
Why ARM Rates HIGH!!!!!
Regulatory Changes Allow Freddie and Fannie to Buy More Loans!!!!
Mortgage Dynamics: Why the 10 Yr Treasury Fails as Benchmark to Track Rates
What or Who Are Fannie Mae and Freddie Mac? 
Do You Want To Know How Mortgage Rates Are Determined?

You can find AJ Nisen on Active Rain at Contra Costa California Mortgages.  Call AJ to talk about your Mortgage, Mortgage Rates, Free Credit Report or visit AJ's website to use his mortgage calculator. 

Alan 'AJ' Nisen
Mortgage Loan Officer
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