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What’s with Interest Rates, didn’t the Fed just cut them?

Mortgage and Lending with Cornerstone Mortgage Company

They sure did and without going into a lengthy dissertation on how the Bond market works in anticipating rate cuts by the Fed, suffice it to say that there are two major factors at work.


First, the Federal government just pledged $700 Billion (with a B) toward bailing out the credit market. Well where do you think that money is going to come from (some people say “they’ll just print the money” unfortunately for the value of the Dollar, this is somewhat accurate)? The Fed’s are going to raise the money largely from the sale of government backed securities, or Treasury bonds and notes. It’s simple supply and demand. When the supply of something goes up the price comes down. In this case the Treasury is financing the $700 billion pledge by auctioning Treasury notes. More Treasury Notes = more supply = lower prices. What does this have to do with interest rates? Interest rates for home loans track the 10 year Treasury note most of the time. Since there is an inverse relationship (think about a playground seesaw) between a bond’s price and yield (yield is what rates are keyed to), what do you think happens when prices of bonds go down and yields go up? You got it, rates rise as well. This is a big reason why rates went up after the Fed cut.


Secondly, the banks are freaked! Think about it. They just went through the most horrible consolidation in the banking industry since the S & L crisis of the late 80’s. Banks were failing left and right. Indy Mac, WAMU, Lehman, all gone, along with 180 or so smaller mortgage banking operations. These guys are done sticking their necks out for anything that isn’t “a sure thing” at this point. They will lend money for a home loan purchase or refinance begrudgingly, but you will pay. Their margins are higher than I have ever seen them in my 10 years in the mortgage industry. It’s not greed, it’s self preservation.