Banks getting greedy and taking it out on the spread? Anyone care to hypothesize how the feds are going to force banks to narrow the rate? Anyone think the FED will start running late-night ads for 30yr-fixed @ 3%?
Thanks TARP. Every bank I deal with got suddenly very very cocky when they got the TARP. Which means lot's and lot's of RE overhang.
Banks are waiting for inflation to kick in before they lend that money out. Then when inflation kicks in, fed raises rates to 8 or 9% and the banks loan the tarp money out at the higher rates. The banks know its coming. How many of you are putting your cash in CDs at 2% if they had to be locked in for 30 years? banks dont want to earn that interest rate either...they want a more respectable rate. Why not sit on the cash until the fed raises rates?
FED is going to take their sweet time to raise those rates, believe me I highly doubt its going to be anytime soon, if anything you might see rates at 1% sometime at the end of 2010, however with all this chat about a turnaround in 2009 you would think he would get the rates up to 0.75-1% by the end of 2009.
Mortgage rates typically increase/decrease as bond yields increase/decrease. Good point that spread is also a factor. For example, mortgage rates recently plunged in Canada (many lenders offering 5 year rates around 3.75%, give or take a few bps), following a dramatic decline in the yield of 5 year Government of Canada bonds. GoC bond yields have since increased around 0.60%, so 5 year rates are likely to follow soon.
The fed may not have much of a say in it anymore. long yields may just run away from them. They may be able to buy it down for a little longer, but...
Mortgage rates are climbing for only two reasons. 1) The Fed was not in the market on Weds obviously (agency MBS program), 2) Without the Fed buying enough agencies and MBS, rates go up. Free market price is not present price you see. These are price supported securities. I'm sure the Fed was just doing a little experiment to see what would happen if it took a day off. Expect them to jump back in with full vigor. PS: There is no technically feasible way the Fed loses control of rates if it decides to target a certain price. They can print unlimited money to make it happen. Look at Japanese yield curve for evidence that this, and furthermore that it doesn't necessarily imply the currency is Zimbabwe worthless.