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Finding the best mortgage rates: A historical review of influential factors

Tuesday, June 29th, 2010

LendingTree’s Chief Economist Cameron Findlay recently completed an over the past 18 months. Even as we have seen dramatically , the chart above shows how quickly the rates have fluctuated in response to domestic and global events. Here are some of the high and low points for mortgage rates that Findlay identified over the past year:

March 18, 2009 Quantitative easing begins –  and rates go lower. Quantitative easing is a monetary policy used to promote a more active lending environment when the government has few other options. The Federal Reserve buys (longer maturity) U.S. Treasury bonds, creating an intentional demand that drives bond prices higher (and long-term yields lower). By doing this, the Federal Reserve is essentially pumping more cash into the market. Banks are able to to balance their capital reserve requirements –  and loan out more money.

Also during this same time, the U.S. government expanded its Agency Mortgage Backed Securities buyback program from $500 billion to $1.25 trillion for Fannie or Freddie mortgage backed securities. Mortgage backed securities are bundled mortgages created by banking or financial institutions that are then sold to investors who are repaid through the mortgage payments. Demand for these securitized packages of loans, which also serve as a stimulus for banks to originate loans, fell off during the housing crisis. The Federal Reserve’s decision to step in allowed for banks to continue originating loans.

April/May, 2009 The Federal Reserve decided to end Quantitative easing by ending its purchase of Treasury bonds. Demand for the Treasury bonds dropped, prices fell and rates rose as the market reacted with uncertainty to the government’s decision to stop buying the bonds. This resulted in a leap in mortgage rates from 5.00% to 5.74% in a matter of two weeks.

August, 2009: Reports of low inflation risk, along with the continued involvement of the Federal Reserve in buying mortgage backed securities, pushes mortgage rates down again. This is because low inflation expectations tend to encourage more investment in Treasury Notes and Bonds. With higher demand for bonds, you see higher prices for bonds  - and lower mortgage rates.

Dec 2009/Jan 2010. Mortgage rates go up as various Wall Street banks (dealers) evaluate a new Prime Mortgage Credit Default Swap [CDS] market. The attention on the CDS worries investors because it would lead to price declines on the securities tied to the prime mortgages. So they start to reduce their potential exposure by divesting of bonds – resulting in the rate increase. CDS trading was expected to begin in the first quarter of 2010, but it hasn’t yet taken place.

March/April 2010: The Federal Reserve announces an end to the  $1.25 trillion agency mortgage backed securities program. Despite being announced well ahead of time, interest rates increase as the demand for such securities wanes. As demand is reduced, prices fall and rates rise.

May 2010. Sparked by , European debt crisis begins and interest rates drop as investors move their funds into comparatively safer U.S. government bonds (such as Treasury Bonds). With greater demand for U.S. government insured debt, interest rates here at home go lower.

LendingTree has several tools to monitor rates. You can check daily updates in the LendingTree . Also, the newly-created Weekly Mortgage Rate Pulse, published each Wednesday, provides the lowest and average mortgage rates available through network lenders. You can find it in the page under the “Recent Mortgage Rate Articles” section.

Learn more about how to get the best interest rates by reading this LendingTree article, “.”