Wachovia’s CEO, Kennedy Thompson, is the latest casualty of the securitized mortgage investment bubble. Banks are continuing to suffer from investing in mortgage backed securities without properly assessing the risk of their investment.
Housing continues to falter but inventories could recede to acceptable levels by the end of the year. Also, consumer confidence remains at an all time low and fuel prices at an all time high and the Fed Funds rate is 2.0%. So mortgage interest rates should be down so that borrowing money looks attractive to buyers, right? Not entirely, mortgage bonds are traded on the open market just as treasury bonds and stocks are. So interest rates must be commensurate with the price of the bonds so that they are attractive to buyers of bonds. Inflationary fears are high and rightfully so with the Fed funds rate so low and fuel prices so high and core inflation recently topped the Fed’s unspoken 2.0% high water mark. During times of inflation interest rates increase so that investors will continue to be attracted to bonds as the price of bonds drops. The risk that was not being assessed and caused the mortgage investment bubble is now reastablishing how the markets are supposed to operate. Increased risk and decreased demand mean higher yields (higher interest rates) in order to attract investors.
We expect continued volatility for the short term due to these highly uncertain economic times and historically low consumer confidence. Also, 30 year fixed mortgage interest rates rose last week and we do not see them dropping to previous levels again until inflation subsides.
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Stay tuned and stay in touch with your mortgage professional. Thank you for the opportunity to serve you and your clients. David. 919.851.0999.