Bill McCord gives a clear, simple description of the relationship between the Federal Reserve Bank, Mortgage Backed Bonds/Securities and Mortgage interest rates in an article “The Fed and Mortgage Rates” on his blog site.   I particularly agreed with the first fact in his article:  “There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.”  How true!  He goes on to explain that Mortgage Interest Rates are related to long term bonds.  This reminded me of a discussion I heard on PBS radio last week regarding the same subject.  The experts on this program also stated that reducing the Fed Rate will not lower Morgage Interest Rates, only credit card and consumer interest rates. 

So the next question is, if the real estate market is sluggish, why don’t lenders lower mortgage interest rates to pep it up?  The answer is–are you ready for this?–FEAR.  With a perceived shaky market, and with the raising of the ceiling on conforming loans, the lender feels he is taking a greater risk, and to cover that, keeps mortgage interest rates from being reduced.

The up side of this is that interest rates are not THAT high, compared to other periods of time.  I remember buying a condo in around 1992 at 12% interest, and friends of mine have reported having mortgages at much higher rates than that.  So if we look at overall trends, we’re in an o.k. place regarding interest rates right now!