Prior to the vote on the bailout package experts have been divided on the direction of mortage rates for the future. When polled on what they think about the direction of mortgage rates through November 2008 almost half of the experts polled said they thought that mortgage rates will rise in the short term. 43% of those polled said they believed mortgage rates would fall slightly and 10% felt that rates would remain the same.

Of those who feel that rates will be rising the consensus is that a $700 billion bailout will cause a supply glut in the bond markets which will trigger a rise in mortgage rates. Bonds are debt certificates that are issued either by corporations or the government and they guarantee the payment of both the original principle as well as interest by a specified date in the future. It is estimated by the Bond Market Association that roughly 25% of the bond market is comprised of mortgage debt.

Those who felt that rates would decline feel that if the Treasury uses the $700 billion to buy mortgage backed securities rather than government backed securities, then mortgage rates are sure to fall.

Mortgage backed securities are packages of mortgage debt obligations that have been created by private and government entities for resale to investors. The packages are called Mortgage Backed Securities because the payments are coming from mortgage debt obligations. Banks are the typical investors for Mortgage Backed Securities and the money they make from these debt obligations is then loaned back out to their customers in the form or mortgages and home equity loans. Often times these are unsecured loans because the banks are not concerned with the borrowers being able to pay the loans back. The banks repackage the loans and then sell them as Mortgage Backed Securities.

Government backed securities on the other hand are government debts which are considered very safe because they are backed by the taxing power and credit of the U.S. government. They are considered safe because they have very little chance of default.

It’s hard to predict how the bail out cash will be spent and what types of debt obligations the Treasury will be purchasing. It is apparent that how this money is spent will directly affect mortgage rates, possibly to a great extent and for a long time. Current predictions point to mortgage rates falling over the next two years and today’s decision by the Federal Reserve to cut 50 basis points certainly points in that direction. The only fly in this ointment is inflation. If we see inflation start to heat up then it’s almost certain that mortgage rates will rise and if the inflation is bad enough they could rise dramatically.

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