Mortgage Rates December 17, 2008 EOB

What a day.

After the FEDs Historic announcement yesterday, MBS acted in proper fashion and started there advance toward never before seen territory.  At one point today (12/17/2008) we witnessed rates reach as LOW as 4.5% (on lender rate sheets).  The party didn’t last long for the 30 YR FNMA 4.5%. Just as with stocks, investors are focused on the gain.  Once there targets were reached (102.90625) the selling momentum began. By market close the 30 YR FNMA 4.5% gave up 28bp.

To be honest I cannot see rates dropping below 4%. The reasoning is based on a simple investment calculation called Return On Investment (ROI).  Ask yourself would you invest your money in a investment vehicle that produces as fixed low return?

What has driven rates low this far is partially based on investor’s front running the FED.  The FED clearly announced their intent to buy MBS, thus if you get in now you can sell latter to the FED, it’s a guarantee.  Yes we could see the FED drive MBS rates to 1%, although as a consumer you will not have the ability to lock at 1%.  Banks and Lenders will not produce a ROI, and have what is known as interest rate calculation.  The calculation will consist of what the lender or bank can borrow at plus a risk premium which equals the rate they pass along to you the consumer.

(1% MBS + 3% risk premium = 4%)
Ask yourself would you deposit your funds into a CD earning less than 1%?

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