Why Mortgage Rates Are Rising Despite Government Efforts

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Mike Larson takes a closer look at government bailout programs and what that means for the U.S. In this issue of Money and Markets, Mr. Larson discusses how the primary goal of these bailout efforts is to lower the financing costs associated with home purchases.

Mike Larson takes a closer look at government bailout programs and what that means for the U.S. Mr. Larson discusses how the primary goal of these bailout efforts is to lower the financing costs associated with home purchases.

The government has agreed to buy Mortgage Backed Securities (MBS) in the open market. It has pledged to take hundreds of billions of dollars in assets from the nation's major financial firms. And it has promised to infuse the banking system with as much as $250 billion in capital.

The primary goal of these bailout efforts is to lower the financing costs associated with home purchases. But the result of all these efforts is that mortgage rates are going up.

The 30-year fixed mortgage is America's fundamental loan. Long before the industry thought up new and creative ways for borrowers to bury themselves in horrid loans, it's what home buyers typically used to purchase a home. And it's what Mr. Larson believes both borrowers and lenders are returning to because of the safety and stability that a long-term, fixed rate mortgage provides. But rates on 30-year fixed loans aren't going down; they're going up. The average 30-year rate jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%), itself the highest in more than a year.

How can rates be going up when the economy is going down and the government is trying everything it can to stabilize the banking sector and credit markets? Because bond investors are dumping bonds, and when bond prices fall, bond yields (interest rates) rise. Why are investors selling bonds? Because the budget deficit recently soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country.

According to Larson, the deficit will likely surge by a few hundred billion more dollars in fiscal 2009 because of all the new bailout plans. But no one in Washington has shown any willingness to raise taxes to pay for all of these bailout programs.

The U.S. is a net debtor nation, and is going to have to borrow hundreds of billions of dollars to make good on all of our promises.
That means a flood of Treasury debt the likes of which the U.S. has never seen is going to wash over the market in the coming year or two. Bond traders know that will overwhelm bond demand. So they're selling bonds now, driving prices down and rates up. Long bond futures plunged from an intraday high of 124 23/32 in mid-September to recently around 114, a decline of more than ten points in price. Since bond yields move in the opposite direction of prices, they're going up. The benchmark 10-year Treasury Note now yields about 4%, up from the 3.4% area in September.

"Politicians and policymakers would like you to think they can just wave a magic wand, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2003-2007. But they can't. The bond market is pushing back and saying loud and clear: 'There is no such thing as a free lunch.'
My bottom line message hasn't changed, either. I continue to expect any recovery in the housing and credit markets to take a long time. And I continue to believe that while all of these government bailout programs can treat some of the downturn's symptoms, they can't cure the underlying disease. The only real cures are time and price changes," Larson states.

To read this issue online, please visit:

About Mike Larson and Money and Markets:
Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (http://www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit http://www.moneyandmarkets.com.


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