If in attendance is a credit crunch, why are mortgage interest rates going down?
Answers:
Rates aren't based on the availability of credit, they're based on liquidity within the market and usually centered around the 10 year Treasury Bill.
Lately the market have been hard on investors, so they've pulled out of stocks and purchased government-backed T-Bills (nearly guaranteed returns). When the yield on T-Bills go up, rates typically go down as we've see the last month or so.
Once the 'bailout' is complete, confidence will improve and investors will slowly return to stocks, which enjoy a much higher potential of long-term return, while a T-Bill is a very low return over the long-term. Once investors move away from the T-Bills mortgage rates will probably dance back up.
It's quite possible that it won't come about this way too, since nobody quite know how the bailout will affect investor confidence. In the long-run odds are rates will climb back up another point or two... but that's in recent times my guess. Source(s): Mortgage underwriter
My understanding of the situation is that the credit problem is caused by debtors anyone so overextended that they are unable to pay their debts. Interest rates are controlled more by the availability of money from the federal mound, where the interest rates are controlled and established as part of monetary policy.
Increasing interest rates at this time would organize to even more failures as the debtors barely competent to meet their obligations underneath currently low rates would go under due to the increase surrounded by their monthly obligations.
Increasing rates in an endeavour to cover losses from failures would be counterproductive at the present time. It would result in even more failure and greater losses.
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