Today Fed Chairman Ben Bernanke gave testimony about the economy and credit markets to the House Financial Services Committee. During the Q&A, Representative Luis Gutierrez (D-IL) asked why mortgage rates are going up, even though Fed rates are lower. It is truly frightening that the lawmakers who regulate the financial markets don’t even know how the markets work. Bernanke didn’t answer the question specifically either. But the answer is that mortgage rates are derived in real-time daily trading from mortgage bond yields, NOT periodic changes to Fed rates. In the recent weeks since the aggressive Fed cuts, inflation fears have become front and center–largely because Fed cuts may be over-stimulative. Bonds tend to sell off on inflation fears, and when bond prices decline in selloffs (like we’ve seen recently), yields (or rates) rise.
If the people who make our financial laws don’t even know this, it means we could see new laws that could hurt the troubled credit markets even worse. Make no mistake: a rush to legislate tougher loan guidelines (to sound tough in an election year) will prohibit countless existing homeowners from refinancing. Instead of legislating our way out of the credit crunch, the market must run it’s natural course.
So far hundreds of mortgage companies have closed, 150,000+ mortgage-related jobs have evaporated, and billions in losses have been reported as global and local financial firms re-group, merge, acquire and find a way to bring market-relevant product to consumers. Legislation isn’t required because no warehouse banks will fund loans and no investors will buy blocks of loans until they see that each and every borrower behind that loan is a good credit risk. The system is currently correcting itself, but it’s a question of when. It’s not a question of legislation.