I used to read that mortgage rates were tied to the 30-year U.S. Treasury Notes. That isn’t actually true. And with the turmoil in the markets mortgage rates haven’t been as closely related to 30-year treasury bonds as they may have been in the past. It isn’t really surprising. How many people do you know that keep their mortgages for 30 years? Not very many, right? Most people refinance their mortgages along the way. At least they have in the current markets. Why would anyone hold on to a 15% mortgage rate obtained 25 years ago?

As the Federal Reserve has lowered the Federal funds rate down to almost zero, the banks have enjoyed the low rates at which they can borrow overnight from other banks. The consumers have been able to get 30-year fixed rate mortgages at rates that have enticed virtually every mortgage holder out there to refinance. With that the yield curve for mortgage backed securities has changed. It still has the typical shape of diminishing increases as the length of time of the investment increases but the yields overall have decreased.

With the turmoil in the housing market many investors have shied away from mortgage backed securities. Those are the bonds which are backed by portfolios of mortgages. The only government agency that can issue mortgage backed securities is Ginnie Mae. Ginnie Mae does not originate loans but they do guarantee loans issued by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service and the Office of Public and Indian Housing. Ginnie Mae is supposed to insure that low and middle income households have access to mortgages.

Ginnie Mae is the only agency that can offer mortgage backed securities that have the full faith and credit of the government behind them. Fannie Mae and Freddie Mac lend money to mortgage bankers so they can provide loans to low income and middle income home buyers. With the recent problems in the housing market, large portfolios of non performing mortgages were taken over and sold cheaply or refinanced.

The traditional relationship between mortgage rates and U.S. Treasury bonds has become less strong. The events in the housing market have been too severe to not have an impact. Bond prices do fluctuate with supply and demand. Risk of any kind affects the rates on bonds and their prices. With the length of the average mortgage lying closer to 10 years rather than 30 years, it would make sense to try to relate mortgage rates to 10 year U.S. Treasuries. It has also been suggested that the markets are so short term that the 90 day treasuries are actually the better indicator of where mortgage rates are headed.

Either way, mortgage rates have been very low for a number of years now. When the Federal Reserve adjusts the Federal Funds Rate, you can expect to see the impact on mortgage rates within days if not within hours. With the increased speed in communication, we have also seen faster reactions. The mortgage rates do not always go in the same direction as the Federal Funds Rate although they usually do. What really matters is the state of the economy. That is why you will see investors waiting with baited breath for the content of the Federal Reserve’s statements. That is where they announce their predictions of where they think the economy is headed.

However, as an astute observer of the world around you, you may be able to notice where the economy is headed on your own provided you don’t live in some part of the country that is moving counter to the general economy. If you do, you have probably figured that out by now.