Mortgage rates climb on international reaction to Fed news

November 12th, 2010

While President Obama concluded his Asian trip with the G20 economic summit in Seoul, South Korea, mortgage rates climbed at home. Proving the connectivity of the global economy, foreign leaders banded together to express their displeasure with last week’s Fed announcement. How does this impact you? In the short term you’ll need to use higher rates in your mortgage calculator equations. Here is a brief synopsis of economic news that impacted housing and mortgage markets this week.

Freddie Mac mortgage survey touches low

Every week since 1971, the Federal Home Loan Mortgage Corporation, better known as Freddie Mac, has conducted its Primary Mortgage Market Survey and published the results weekly. The survey polls 125 mortgage originators including banks, thrifts, credit unions and mortgage companies over a three-day period and then publishes the average of their rates.

Rates change on a daily basis, and for the past several weeks tremendous swings during the day have caused many lenders to change their rates during the day. This is important to know because the rate you read about in the paper on Wednesday was the rate available on Tuesday. Calling your mortgage professional on Wednesday afternoon may result in a different rate — lately it’s not that the rate may be different, it probably will be different.

This week mortgage markets were closed on Wednesday for Veteran’s Day, so the Freddie Mac survey consisted of rates for Monday and Tuesday. The results of the Primary Mortgage Market Survey were that the benchmark 30-year fixed rate mortgage at a cost of 0.80 origination points hit an all-time low of 4.17 percent. That rate did not last beyond Tuesday as mortgage markets saw rates spike on Thursday and Friday in response to reaction from foreign nations to American monetary policy.

If you used refinance calculators or prequalification calculators based on average rates early last week you were inputting all-time low mortgage rates; if you want your numbers to be based on the most up-to-date information you might want to run those calculators again with higher mortgage rates.

Currency wars

Last week we posted on the Federal Reserve’s policy announcement that by the end of the 2nd Quarter 2011 it would purchase $650 billion in U.S. Treasury bills and bonds. In addition to the new influx of $650 billion into the economy the Fed will also recirculate back into the economy, through the purchase of more Treasury debt, another $250 to $300 billion that the Fed will receive from mortgages paying off that it purchased between December 2008 to March 2010.

Theoretically the Fed’s move would keep rates down and put some inflation into the economy — which would represent economic growth. In reality, foreign nations are not pleased at all with the Fed’s plan. The reason for their discontent is that the injection of an additional $650 to $950 billion into the economy weakens the U.S. dollar.

Why other nations don’t like a weak dollar

When the U.S. dollar is weak, foreign goods that are imported into the United States cost more money for the American consumer to purchase. When prices go up on a product fewer units are sold. Foreign nations see the move by the Federal Reserve as a way to reduce imports from their countries into the United States. This hurts their economies, many of which are struggling more than the U.S. economy.

American monetary policy as implemented by the Federal Reserve is concerned with the American economy, not the economies of Brazil, China or France. The reaction of the other participants at the G20 summit was to demand that the U.S. back off on its policy, raise interest rates and strengthen the dollar. While the meetings were occurring China raised its interest rates and strengthened its currency to attract foreign investment. As this was occurring investors from around the world backed off on purchasing bonds in the U.S. The resulting decline in demand forced bond prices down and yields, or interest rates, higher on Thursday and Friday.

What to expect in mortgage rates

As the G20 leaders head back home over the weekend they will return to their own problems and economies that need to be revived. Slowly the focus will shift from the United States and most likely to Europe where Ireland’s economy is close to collapsing. Investors will realize that the safest place for their money is in bonds backed by the United States Treasury or other American enterprises. This should result in the spike in mortgage rates to subside in the coming weeks. And lower rates for you to input into mortgage calculators.


Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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