What Mortgage Rates Will Do Over The Next 30 Days (January 29, 2009 Edition)

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I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey is now available.

The Bankrate.com survey is for conforming mortgages.  It does not apply to FHA mortgages, VA mortgages, jumbo mortgages, or foreign national mortgages.  For rate quotes,.

The group's 30-day prediction for mortgage rates:

• 55% predict mortgage rates will increase
• 9% predict mortgage rates will decrease
• 36% predict mortgage rates will remain unchanged

I am predicting that rates will remain unchanged over the next 30 days. My prediction may not be appropriate for your individual situation and it may be wrong, too.

Here's what I told Bankrate.com:

"Market forces toward higher rates are countered by open-market buying from the Fed."

We've covered this topic a few times so in case you're bored, here's a fresh take. 

When a person invests in mortgage bonds, what's he buying a stream of payments, made at regular intervals, over some period of time.  The absolute value of those payments never change -- it's always the same dollar amount.  The relative value, however, can change.  And does. 

If, over time, the U.S. dollar increases in value relative to currencies worldwide, suddenly those mortgage bond repayments are worth more; again, relative to other currencies worldwide.  The reverse is true, too.  If the dollars loses value, those repayments are worth less relative.

This dynamic is different than what drives stock prices.  Stock prices, in most cases, are tied to large corporations that do business in multiple currencies.  Each company's relative exposure to the U.S. dollar, therefore, while present, is smaller than a bond-owning individual's exposure to the U.S. dollar.

So, mortgage bond investors own the rights to mortgage bond payments over time and the value of those payment is tightly tied to the value of the U.S. dollar.  And this is where the inherent conflict in the government's plan to drive down mortgage rates comes in.  With each new stimulus, the government is forced to -- literally -- print more money, thereby making the plan more expensive to execute.

More simply:

• The government drives down mortgage rates by buying mortgage-backed bonds
• The government "makes" the money it need to buy these bonds
• In making money, the government renders the bonds less attractive to investors
• Investors react by selling bonds, driving up mortgage rates

Lather, rise, repeat. 

It's a vicious cycle that the Fed already recognized and fingered; yesterday's press release noted that more funds may be allocated for buying mortgage-backed securities.  It's a losing battle, though, because in the battle of wills, the markets will always beat the government. 

For now, the feds are just buying time until the economy comes around.

Mortgage rates remain near their lowest levels of the last 6 weeks. If you haven't talked to your loan officer about a refinance, or if you're shopping for a home loan, you find better terms today than at some point even next week.

In the meanwhile, I post mid-day mortgage rate updates on my Twitter feed along with running commentary. Follow me at http://www.twitter.com/mortgagereports and join the conversation anytime.