There has been a lot of brew-ha surrounding the 4.5% mortgage rates Treasury Secretary Henry Paulson stated was his desire as another {senseless} effort to boost the housing market and ultimately the economy. Real estate and mortgage bloggers, hell any blog that wanted to get some action, was posting something with that 4.5% statement in it, and a wide variety of opinions can be read. My own take is located here...Florida Mortgage Rates Hit 4.5%.

Now, regardless of how you feel overall, one need be concerned only with how we get to mortgage rates this low, especially when fundamentals are not sound. Mortgage rates are derived from mortgage backed securities, nothing else, and those are traded on the open market like any stock, commodity, even currency. Since mortgage backed securities are basically bonds, they tend to respond to the same things as other bonds. That means data supporting a weak economy tends to drive mortgage bond prices higher and thus bring mortgage rates lower.

In essence, the fundamentals which should be driving mortgage rates are surrounding a poorly performing economy, which no doubt we have been seeing, especially now that the NBER declared we have been in a recession for the last year. However, the so-called archenemy of mortgage bonds, and thus mortgage rates, is inflation, which every effort that the government does during these attempted bailouts increases inflationary risks, including the inevitable cut in the Fed Funds Rate. I will be adding a post later tonight or tomorrow talking about how inflationary rates could reach 20%, so you may not want to miss that one.

To read the rest, please head over to the Florida Mortgage Report.