Thanks to Dan Hray of Chase Bank for this update: 
Quite a few people are trying to understand why current mortgage rates are climbing despite the government's best efforts. I believe this can be summed up in one word -- uncertainty. Here is some background:
Lenders in the London Interbank Offered Rate (LIBOR) market are uncertain that counterparts will pay back loans, thus producing higher financing rates while the U.S. Federal Reserve's federal-funds target rate has been lowered to 1.5 percent. This makes mortgages less attractive to hold since most leveraged investors borrow money at or above LIBOR.
Investors are uncertain whether the government's rescue package will be successful. Not believing the government's implied guarantee, foreign investors have shied away from Fannie Mae and Freddie Mac mortgage-backed securities (MBS). Wall Street is wondering how Fannie Mae and Freddie Mac will be able to buy mortgages for their portfolios when their cost of borrowing continues to rise. Only $5 billion of MBS have been purchased so far.
Elevated uncertainty leads to volatility. Volatility is at historical highs in both the fixed income and equity markets. Volatility adversely impacts mortgage prices (rates) as cash flows from prepayment become less predictable. Investors are also uncertain as to the amount of additional U.S. Treasury debt that will be required to fund the government rescue package. Long term rates have already risen which impacts mortgage rates. Only short term Treasury securities have benefited from this environment and the Fed's 50bp rate cut.
Summary I expect mortgage rates to be volatile through the end of 2008 as both investor and dealer risk tolerance is low. However, I believe mortgage rates will edge lower over time due to the slowing economic landscape and the extraordinary steps that the government is taking to restore confidence to the credit markets.
Dan W. Hrey
Mortgage Officer
Paradise Valley, AZ
Office: 480-308-5316
Cell: 480 220-4858
Toll Free: 888-242-7388 ext 5316
dan.w.hrey@chase.com
Contact Gary and Claudia Scott for all of your Scottsdale Arizona Real Estate needs.
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