The Truth Why Are Mortgage Rates Going Up

Today, Freddie Mac's chief economist Frank Nothaft, said that the 30-year fixed-rate mortgage average was up from last week to 6.63% with an average 0.6 origination point."

He blamed market concerns about rising inflation, further weakness in the housing market and greater probability that the Federal Reserve will raise short-term rates this year all combined to push mortgage rates higher this week. And that some of the key drivers to these concerns were consumer prices jumping 1.1% (annualized) in June - the largest increase since September 2005 on a year-over-year basis - coupled with consumer prices growing at a 5% clip (on a year-over-year basis), the strongest since February 1991.

Now, here's the truth.

Over the last 18 months, there has been a systematic destruction and elimination of lenders in the mortgage business. Some claim that this is because they did bad things, and yes some did. But the real truth is that up until this time, mortgages were routinely and easily sold to investors via Wall Street and what is called the securitization process.

Securitization means that mortgages are pooled into investment vehicles so that an investor, possibly a pension fund, can buy a long-term stream of income at a fixed rate or return. You might think of this as being similar to giant CDs.

Now, because Wall Street committed fraud on a massive scale (the dirty secret Mr. Paulson and Mr. Bernanke are trying to hide) by duplicating and over-selling these investments, Wall Street has simply exited the mortgage securitization business. This leaves Fannie Mae and Freddie Mac as the only buyers and securitzation packagers of mortgages. Unfortunately, Fannie and Freddie are out of cash, and now simply can't afford to buy more mortgages and hold them without having investors ready to buy the resulting securities. BTW, Fannie and Freddie are not without blame in this mess either.

FYI, there are many investors ready and willing to buy mortgage backed securities paying a stable 6% to 7% rate if they had a good feeling that the home owners would keep paying the underlying mortgages. But, our friends on Wall Street have lost all credibility, and Fannie and Freddie are not far behind in the lack of trust department. IMO, most people are happy to pay their mortgage.

So, with only a few investors willing to buy securitized mortgages, they can be real picky and ask for whatever rate they want.

Now, add to this the wonderful 600-plus page Congressman Barney Frank monstrosity of legislation (HR 3221) called something like the "Homeowners Rescue Plan" ....blather blather blather.

Along with about another hundred or so bombs, this gem essentially forces mortgage investors to forgive portions of the home owners debt and reduce the formerly agreed upon interest rate. Don't read me the wrong way here, I'm all in favor of helping people, but this is really dumb because anyone knows that if investors have to take a loss, they will simply make it up by raising prices on the next opportunity. And, presto, there you go, we have now higher mortgage rates.

My suggestion to the Democratic leadership via Senator Reid and Speaker Pelosi was to shut down the Iraq spending of more than $1 billion per day, bring our troops home, and hand out the daily billion dollars to hopeless screwed homeowners via a television lottery show. This would sure be more fun than watching Howie Mandrel try to fake out another unsuspecting hapless contestant on the ridiculously over-dramatic "Deal or No Deal" And for the male viewers, we can redeploy the "Briefcase Babes" and let them hand out the cash in person. Is Ed McMahon still available?

The Best Money Guy.