Mortgage Rates Dip on Government’s Bank Bailout Plan

Investor’s in the stock market were not very pleased with the government’s latest attempt at a bank bailout plan. The Dow tumbled 382 points, led by the financials. About the only bright spot pertaining to financial matters was that the 10-year Treasury yield dropped by almost a .2% margin, which in turn, created a bit of a dip in mortgage rates. Interest rates have been steadily climbing over the past couple weeks, so we’ll take the short term dip, but look at the bigger picture.

Treasury Secretary Timothy Geithner outlined the plan today, which in the ears of many, lacked specifics. Anything that creates major financial doubt usually ends up with a sell-off in the market, which we encountered today. Bonds were bought up in a flight to safety and the yields dropped. Although the short-term action is good for mortgage rates, the longer-term view is not so clear as it pertains to risk, and it’s effect on mortgage rates.


The market really wanted to hear a specific and solid plan by the government relating to banks soured assets, and how their balance sheets would be cleared of the mess. Instead, they heard a more general plan of attack, and one that involves the assistance of private sector investment to help buy-up the bad assets. The realization that this issue is going to take more time than anticipated to remedy did not set well with the market.

There is question as to whether the government really has an idea of how to initiate the financial rescue plan. The incredible difficulty of valuing these soured assets on its own, could cause a major delay in any balance sheet magic for the troubled financial community. If there’s no price tag or value for the bad assets, no one is going to buy them.

So, how will this affect mortgage rates in the coming months? Keep in mind that the tow major components that make up mortgage rates are the 10-year Treasury yield and the mortgage spread risk premium. With the current unsettled and risky investment environment, treasury yields might actually stay in the 3 percent range in the near future. On the other side, risk premiums could rise even higher than their current historic lofty levels and cause rates to rise a bit more from here.

Undoubtedly, there will be much more spin from the government on their bailout specifics, as they make more headway into valuations and create investment channels. This may result in major mortgage rate movements, one way or the other. In short, expect a volatile season for not only mortgage rates, but the economy as a whole.

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