Roger Schlesinger

I will start with a long time coming confession: it isn't me. So many of my clients are wary about me that they are sure I have my hand in it some how. Nope! It is way more complex than that. Let us begin at the beginning, we are talking about mortgage rates in these United States. And no the Federal Reserve doesn't set them either.

The President doesn't have a say nor does Congress or the Senate, and you can also rule out the Secretary of the Treasury.

If you have ever gone to Chicago and been to the Chicago Board of Trade and seen all the people running around in those wild jackets (smocks) with a strange name or group of letters, then you have been to the mountain top when it comes to mortgage rates. Those people are heavily responsible for the mortgage rates, albeit indirectly. If I quit now, I would be ahead and you wouldn't, so I will go on. These traders work in the trading pits and trade U.S. Treasury notes, bills and bonds which are the benchmark for mortgage backed securities which determine, for the most part, our mortgage rates.

Now that we know the players, it’s time to explain the game. The Federal Reservehas the duty of regulating the money supply at the nations banks and setting the rates for the shortest maturity we know: overnight money. Generally known as the Federal Funds rate, there is also a re discount rate which is the cost of short term money to the banks. In normal times short term money is the cheapest in the yield spread with interest getting higher as the maturity gets longer. Just to add reality to a puzzling situation, the aforementioned "short term money" carries the highest interest rate in our society at this time (Inverted yield curve).

Forgetting yield curves for now, we continue our quest to understand why they are what they are at any given time and who determines this. The traders in the pits in Chicago get and exercise orders from clients (including hedge funds, foreign nations and individual investors). This open market bartering or auction determines the rates for the Treasuries which are considered the safest instruments in the world. The 10 year Treasury note is the instrument that the mortgage backed securities most closely follow. If this note goes up in price, and down in yield, within a few days the mortgage backed securities will follow. They are considered a secure investment because they have pools of mortgages as their security. They aren't as secure as Treasury instruments and thus carry a higher yield.

Roger Schlesinger

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.

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