Will Things Get Better?

I have really been almost amazed by traders mentality these days especially when it comes to the economy. You've heard me talk time and again that rates are largely determined by the fluctuations in demand for MBS (Mortgage Backed Securities). It seems we are fighting an uphill battle armed with water balloons while the traders are at the top with bazookas! See my point? Well then let me explain it to you.

The bottom line is traders seem to have little faith in the performance of MBS given the billions of losses that investors and even huge companies (i.e. Bear Stearns) have taken on these fixed coupons. Even though underwriting guidelines have REALLY tightened, programs have been slashed, MI companies will not ensure anything over 97% ltv and the mortgage market in general has "trimmed the fat" so to speak. The economic data has to be SOOOOOO bad and I stress BAD that traders literally have to feel VERY unsure about the DOW in order to stash money in MBS or the safe haven treasuries!

The Fed, although their efforts have been very admirable, have failed to pass the HUGE savings that large corporations are feeling onto consumers. The bottom line mortgage rates have not followed suit with the reductions that The Federal Government has given the corps and especially; yes no matter how you slice it the "bail out" of Bear Stearns. Most people do not even realize that the Fed opened their doors to taking some of the "less liquid" assets Bear had in order to facilitate the transaction.

Where does that leave us? Well unless the Fed can instill the same faith in MBS that they seem to have tried to instill in the financial markets then mortgage rates will never reach there true "potential"? In the past given the same set of circumstances or performance of Treasuries and MBS (i.e. 2003) rates should be around 5.375-5.5% instead as posted on Bankrate the national average for mortgage rates was lightly over 6.0% last week. If the Fed and in particular the US government want to HELP the economy then they must address the housing sector vigorously! If that means the Fed buying "Agency" MBS then that's what THEY MUST DO! I can guarantee you that if buyers can get 5.375% on a 30 year fixed mortgage the inventory of homes at the national level will dwindle and at a fairly fast pace.

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