The real estate finance industry is a very confusing place for most consumers (and many loan officers) right now, and many of the mass media reports I read or hear aren't helping the situation.  Over the next few weeks I will address some common misconceptions and provide a few updates on the realities of today's mortgage marketplace in the hope of bringing some clarity to the situation.
 
Mortgage Interest Rates 101
 
The need for a knowledgeable and conscientous mortgage professional has never been more important.  The only reliable way to monitor mortgage rates on a real time basis is to monitor the mortgage backed securities market.  The most common misconception that I hear over and over again is that the Federal Reserve's reductions of interest rates automatically translate into a reduction in mortgage rates.  In reality, the opposite is usually true, especially for the week or so following the reduction.  The reason is this - the rates which the Federal Reserve directly controls (Fed Funds Rate, Discount Rate, and Prime Rate) are ALL short term interest rates.  These reductions affect (or should affect) short term rates and/or adjustable rates such as credit cards, car loans, consumer loans, and the like. 
 
Mortgage Interest rates are determined by the demand for fixed rate mortgage backed securities which are mostly issued by Fannie Mae and Freddie Mac (known as GSEs - government sponsored enterprises).  The higher the demand is for these bonds/securities, the lower the actual interest rate is.  Wall Street usually sees a reduction in Fed Reserve rates as good news for stocks, and so the demand for stocks goes up, while the demand for bonds goes down (thus a higher interest rate on mortgage backed securities/bonds).  If the Fed continues to push short term rates lower too aggresively and inflation becomes a significant factor, mortgage rates will increase even more in both the short and long term.  So, you might think that a reasonable benchmark by which to guage mortgage interest rates would be the 10 or 30 yr US treasury bond...and that used to be the case.  In these uncertain financial times it is not uncommon for treasuries and mortgage backed securities to move in opposite directions at the same time.  Alot of this has to do with both the devaluation of mortgage backed security pools which contain subprime loans and the perceived stability of the companies which insure mortgage bonds. 
 
Are you still with me?  I can hear the yawns from here...stick with me for just a little longer...you'll have a better understanding of mortgage rates and pricing than many loan officers do...  As if this issue wasn't complicated enough, these days, Fannie Mae and Freddie Mac keep increasing the fees they charge to lenders to deliver a loan to be securitized.  Go figure, the lenders pass it right along to the consumer.  So, even if base interest rates stay the same, the effective interest rate provided to the borrower has increased (and all signs point to a continuing of this trend).  Example:  A borrower with a 640 credit score who wishes to put 5% down on the purchase of a home will pay approximately .25% higher in interest rate today than they would have with the same base interest rate 9 months ago.  The amount of mortgage insurance has increased, as well.  The news may say mortgage rates are getting lower, but depending on your situation, the exact opposite may very well be true.  Fannie and Freddie have announced additional underwriting guideline revisions AND LOAN DELIVERY FEES which will be in place by the end of May.  Wells Fargo announced, yesterday, the introduction of a .75% (300 bps to price) increase to rates on any program which has a guideline change which was not locked prior to that change.  Analysts don't expect the current trends to reverse until 2010.
 
The bottom line is:  If you have considered buying, building, or refinancing any realestate, the time to act is now!  Base rates could creep a bit lower before climbing higher, but lender delivery fee increases show no signs of slowing down...making your net interest rate higher.
 
Marshall Moody is a licensed mortgage broker (68973) and the owner of Stone Oak Mortgage - a full service mortgage broker firm - in San Antonio, TX.  Please feel free to contact him at (210) 497-6565 with any questions or concerns about realestate finance.