Mortgage Rate Update and Commentary

Thanks to the move by the US Treasury Department on Sunday to take over Fannie Mae and Freddie Mac mortgage rates got a great boost this week. Because the government is now backing the Fannie/Freddie bonds, this action created a tremendous surge in demand for them. High demand for bonds drives up bond prices, and the result is rates improved on Monday by 0.50% in rate for almost all conforming fixed rate products.

Since Tuesday rates have increased by about 0.125% in rate, but I believe this increase will be short lived and here’s why. Mortgage Bonds peaked after a fantastic run over the past four weeks. The bond market never moves in a straight line similar to the stock market. There are ups and downs, but it is somewhat predictable as to the general trend. So what’s happening is traders are taking some profits they’ve gained in the past several weeks and bond prices dropped in each of the past four days. This is illustrated by the graph of Mortgage Bond pricing below. The green days are positive for bond prices and mortgage rates, and the red days are negative for bond prices and rates.

There is no good reason for bond prices to get worse over the past four days, other then just being over bought. ALL the signs point to better pricing for mortgage bonds and lower interest rates. Here are the signs I’m seeing:

Price of Crude Oil is BELOW $100 / Barrel
Wholesale prices fell for the fist time this year
Producer prices dropped and was the sharpest decline in 2 years
Retail sales for Aug. was down
Consumer sentiment was higher than expectations
Unemployment is rising

All of this points to greener pastures ahead. We will see some ups and downs along the way, but the general trend should be for better rates over the next weeks and months if the current trend continues.