Hi, Can anyone with an economic understanding help me with a couple of obvious question about US mortages? It's understood that rising bond yields affect the mortage rates - why is this, can't the banks lend, with a margin at a rate that reflects the Feds minimal interest rate? In OZ/NZ it seems that the banks lower their rates in step with the lowering rates from the RBA/RBNZ, why is this not more the case in the US? Secondly, its understood that rising bond yields are detrimental to the stock market, but exactly why is that - is it the rising cost of borrowing, or the better return expected from bonds, or the economic affects from foreclosures or something else or all of these aspects. Any help with these questions is greatly appreciated.
Banks hedge mortgages with the 10 year note. If rates are high investors prefer to sell stocks and buy treasures. If rates are low AND the risk is low, investors sell treasures and buy riskier investments like stock and kiwi....
They can, but they choose not to, mainly because they can originate the loan and resell it to Fannie mae (conforming loans), thus not tying their capital up. They make their servicing spread on the mortgage, and take minimal mortgage risk this way. The agency market dictates the mortgage rates. This is a basic principle in finance. As risk free rate of return rises, the multiple on those assets falls. You must get better return than risk free rate to justify holding a risky asset. High interest rates drive up opportunity cost of holding any assets.