Can the Financial Guys Here Answer a (Simple) Question
 

What or who determines residential mortgage market percentage?

As in: I see that lenders are offering lower rates now across the board than two /three months ago.

I was told recently that the prime (fed) does not have a lot of tie-in with mortgage rates>

Learn me please.

:D

The benchmark for fixed rates is the 10 yr treasury bond. As the 10 yr bond goes down, fixed mortgage rates go down.

I use Freddie Mac's numbers:
http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

The 30 yr fixed peak in early July @ 6.79%.
Last Thursday, the average 30 yr fixed was 6.43%.

It's no coincidence the 10 yr treasury bond peaked around the first of July, as this graphic illustrates:

http://forums.pelicanparts.com/uploa...1158617601.jpg

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&b=5&g=0&id=p10401193626

The 10 yr dropped around 30-45 basis points, and the 30 yr fixed dropped 35 basis points.

On the adjustable rate side, rates are affected by short-term rate averages. LIBOR, COFI, and MTA are some of the short-term interest rate averages. Since June, rates have drifted lower for LIBOR, and CMT, but up for COFI and MTA. You can see these monthly numbers at http://www.moneycafe.com/personal/allstates/interestrates.htm

So, it's not really a who but a what that sets our mortgage rates. As long as China, Japan, and dollar-rich OPEC nations buy our debt, our rates will remain at historically low levels.

Thanks for the info and the links. I'm still not quite sure how or what the 10 yr treasury bond is/does.

Could you break it down a notch or two further please.

Thanks!

:)

The 10 yr treasury bond reflects a risk-free yield. The Chinese can buy 10 yr treasury bonds and get 4.8%, or they can buy mortgage-backed securities at say 5.15% from Fannie Mae. If the 10 yr treasury bond goes up, then the Chinese will say,"Why would I buy your mortgage securities yielding 5.15%, when I can buy the 10 yr treasury bond (with the full guarantee of the US government) at say 5.0%?" Conversely, if the 10 yr treasury bond goes down, the Chinese have to accept a lower yield on the MBS.

I believe I understand more now.

Where do you see the 10yr treasury bond going in the next 12-18 months and with that mortgage-backed securities?

My crystal ball has been giving me problems, lately, but I'll try. ;)

10 yr treasuries up in the short term. The 'smart' money is net short in treasuries, which indicates they expect 10 yr rates to climb. Long-term (3-18 months), it's anybody's guess. Flip a coin.

Is the Chinese really investing in the U.S. economy? I thought that their investment partner in this country was Wally Mart.

They aren't investing, necessarily. They're dumping all the dollars we send them. Based on current numbers, we need foreigners to send us $2-3billion per day to finance our new debt, or nearly $1 trillion per year. The numbers are quite alarming.

If you ask this because of ARM's, ARM's are usually tied to other indeces like the 1 yr. Treasury or 6 mos. LIBOR, COFI or COSI. This really only matter around adjustment time. I have a 5 yr. ARM that's tied to the 6 mos. LIBOR. I couldn't care less what the LIBOR does, since I'll sell before my ARM adjusts.

The 10 year has dropped recently due to less talk of inflation.

The numbers on the debt are alarming, or are they not?

Why are folks so blase about mounting debt?

And...Is the recent drop in mortgage rates a momentary glitch or will they tend to stay low for the forseeable future?

There is just no telling. There are too many factors to make any reasonable predictions. However, as long as the Federal Reserve continues to inject large numbers of new dollars into the financial system, there will constantly be more dollars chasing fewer quality investments. These conditions will work to keep treasury prices high and yields on mortgages low.

So much for commercial traders being short the 10 yr treasury bond. Today's manufacturing numbers put the scare in the market, and traders fled to bonds. The 10 yr treasury bond yield was down 91 basis points. In mortgage terms, this would bring a drop of nearly 0.1% in the 30 yr fixed rate mortgage. This is good for buyers, but the slowing economy and potential for recession has grown. Six steps forward, six steps back.