Mortgage rates follow stock market on wild ride
Mortgage rates followed the stock market on a wild roller coaster ride the past two weeks. The stock market has seen some of the largest gains in losses in history over the past two weeks. Investors who have been following the value of their retirement accounts have probably had many sleepless nights as the stock maret appeared to be on a nose dive down to under the 10,000 level. Following the collapse of Lehman Bros and the near collapse of AIG investors around the world were beginning to bail out of the market at a rapid pace.
The market staged a remarkable turnaround and the first course that helped to change it’s direction was a ruling out of Great Britain that the selling of financial stocks short would be temporarily banned. Soon after this news arrived, the SEC also followed suit with an announcement that shorting almost 800 financial related stocks in the U.S. would also be banned. This news was followed up with a report that the government would be creating a fund to help to purchase bad mortgage and credit debts and improve the liquidity in the credit markets.
Mortgage rates ended the week heading up as investors pulled money out of bonds and invested into equity postions. Mortgage rates which were well under six percent on the 8th of September are now hovering in the low to mid six percent range. The future remains uncertain as the markets will continue to digest information and react to the credit markets. Homeowners need to be decisive in making decisions to refinance their homes or look at buying new homes.
What the GSE bailout means to mortgage rates
Mortgage rates could begin to drift lower thanks to the governments decision to bailout mortgage agency lenders Fannie Mae and Freddie Mac. The stock market is going to take time to digest the long term implications of the Federal Government holding the paper on over 4 trillion dollars of mortgage backed loan securities. As the agency lenders financial situation has worsened this year the spread between interest rates on mortgage backed bond securities and treasury securities has increased. The ten year bond has been well below the 4% level for the past sixty days, but interest rates on mortgage loans has moved very little and remain well above the six percent level.
Investors have grown concerned that the health of the countries housing markets could take a number of years to fully recover and they have increasing desired a larger return to buy mortgage backed loan securities. Billions of dollars of Fannie Mae and Freddie Mac mortgage bonds are opened by governments from other companies further complicating the situation and increasing the strain on the political nature of this financial bailout.
Most experts believe that the spread between treasury bonds and mortgage bonds will decrease, therefore mortgage rates are likely to dip down lower. Now that mortgage bonds are in essence insured by the Federal Government a new window may have opened for home owners to consider refinancing their home mortgage or purchasing a new home. It is unclear if the governments role will change guidelines on refinance or purchase mortgages.