"Prediction is very hard, especially about the future" - Yogi Berra

Mortgage and Lending with First Priority Financial

"Good news! Interest rates on home mortgages are dropping below 4.500%.  And, thanks to the Fed, they'll remain there until Summer."  So says the spin coming from the media.  Since the media isn't in the business of creating fiscal policy, how could they possibly know this?  They're making a prediction, and a faulty one at that.

Let's look at what's really happening.  The Federal Reserve is purchasing mortgage backed securities with coupon rates of 5.000% and 5.500%.  Since the coupon rate reflects the yield that an investor will earn, the notes in these mortgage pools have interest rates in the neighborhood of 6.000-6.500%.  Why the difference?  There's a long line of hands between the origination of a loan and that loan being packaged into and then sold as a mortgage backed security; each one takes a piece of the profit.  Thus, a borrower paying an interest rate of 5.750% would net-down to a coupon rate of 5.000%.

Will this lower interest rates?  The short answer is no.  But, it will limit how high interest rates can go.  With that said, a better assertion would be, "Good news! Interest rates on home mortgages are not going to climb above 6.000% as long as the Fed continues with their purchasing program." 

Comments (2)

Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

That is good news.  Hopefully rates stay low for a while.

Mar 09, 2009 07:27 AM
Alice Linahan
Voices Empower - Argyle, TX


Thank you for the clear explaniation!

Have a great day!!


Mar 09, 2009 08:50 AM