Why Aren't Rates Lower?

Currently zero point rates on 30 Year fixed loans are holding around 5.50%. But didn't they tell us that rates were going to be 4.50%? What gives?

You ask an interesting question Grasshopper. Unfortunately there is no easy answer. So far we haven't seen any effect on rates from the Homeowner Affordability & Stability Plan.

In that plan PBO outlined that the Treasury would be purchasing $200-400B of debt from Fannie & Freddie.

While we wait for the Treasury to step up to the plate and pump some much needed liquidity into the housing finance agencies it's worth taking a look at some of the other players in Mortgage-Backed Securities.

Over much of the past decade and up until the second half of 2008 foreign investors were a huge part of the MBS market. Asian countries were the biggest foreign holders of Fannie and Freddie debt.

In the fourth quarter of last year though foreign investors sold off $170 trillion of Agency debt. Why?

Well it seems there are two answers. The first and seemingly most important is that Fannie and Freddie debt is "effectively" backed by the U.S. Government through it's Fed and Treasury support.

Unfortunately though it is not backed by "the full faith and credit" of the U.S. Government meaning that it would be paid back no matter what. I doubt we'll see this warranty slapped onto Agency debt anytime soon as it would effectively double the National debt.

The second reason isn't due to the credit-worthiness of Agency debt. It is simply the fact that there are better yielding bonds to purchase. These are corporate bonds backed similarly by the U.S. Government.

The long and short of it is that I wouldn't expect foreign demand for Fannie and Freddie debt to strengthen anytime soon. To the average person out shopping for a mortgage there doesn't look to be any decline in rates spurred by the foreign investors coming.

- Andrew

- reference: Fannie Mae Rescue Hindered as Asians Seek Guarantee