I hate this question, because I feel that I am personally responsible.  Why are mortgage rates getting higher instead of the much needed lower? 

Let me use words that we made up recently and use all the time.  let me explain it in terms that we can understand.  Let me tell you why the general population must suffer. Two words: 

                                      Credit Crunch

 What is this and why does Joe in Idaho need to suffer?

 

The definition of the credit crunch is that there is not enough money around to lend out and too many people needing to borrow it.  Supply vs. demand.  Not enough dollars to lend and too many folks needing them.  Thus the price of money will go up.  Follow this:

 

• Joe takes out a mortgage from Citibank to buy a house
• He borrows $300,000 @ 6% interest for 30 years
• Citibank writes the check out for Joe to pay the seller, etc
• The next week, Citibank adds up all the loans they did. Turns out they did 10,000 mortgages nationwide which add up to $30,000,000
• The bank POOLS all the mortgages and sells them as one big package to JP Morgan Chase
• Chase pays Citibank pays $33,000,000 for the loans
• Chase cuts up the pool into tiny loan pools and sells them to other banks and wall street companies
• They in turn create bonds out of them and sell them to investors in China, Poland and maybe  Russia
• Citibank rolled over the investment, got the money back and lends out another 30 Million
• And so it goes………

 

Here is the problem, nobody in China and the like seem to want the bonds, so wall street cannot sell them, so they will not buy the pools from JP Morgan Chase so Chase won’t buy the big pool from Citi……..CATCH 22.

 

Thus, Citibank lends out the money they do have, but they have to keep the mortgages themselves for a longer amount of time.  They also have less money to lend out because they cannot roll it over.  Therefore, they have to increase their interest rates to make more money on the mortgages. Got it?  PROFIT.

 

When will this change?  When the global economy is comfortable with buying the mortgages again.  When will this be?  Not for a long while.

Dale Siegel

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