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Maybe you've heard about this 4.5 percent mortgage rate thing, sponsored by the government? 

Just to be sure, here's the background:

• Wednesday: A story "leaks" about the U.S. Treasury lowering mortgage rates to 4.5%
• Thursday: "4.5% rates" leads the news
• Friday: 50 million Americans homeowners sit back and ask, "Should I refinance today, or wait for something better?"

Okay, let's address the obvious point first. If mortgage rates are low today, take advantage.  They may not be low tomorrow 3 hours from now.

Think back to the old saw about the bird in hand being worth more than two in the bush.  If you're a parent, you know that adage a little bit differently -- a bag of snacks in hand is worth more than two under the passenger seat.

Yes, mortgage rates could fall tomorrow but why take the chance?  You can get today's low rates via a refinance, and then if rates fall again in the future, you just refinance again.  Most loan officers will cover your closing costs in a situation like this if you ask so the prudent move is to lock up your savings today.

But getting back to the 4.500 percent thing.

Take a look at the articles as published by the business press.  Each of them specifically states that the story is speculation (i.e. no facts).  So, in the absence of facts, let's review two very important notes about the mortgage markets:

1. Historically, the Treasury doesn't set mortgage rates -- free markets do.
2. Government intervention doesn't guarantee low rates.  As evidence, mortgage rates are up by a half-percent since last week already.

In other words, the Treasury may choose to intervene, but markets don't have to play along.  There are other buyers of mortgage bonds besides the government and some of them stand to lose a lot of money if the Treasury's plan pushes through.  Because of lobbyists, this "story" may end up dying a slow death on K Street.

Or, it may not.

Look, I don't mean to say that the 4.5 percent story is a farce and that it won't happen, I only mean to remind you not to base your financial decisions on speculation -- just ask the airlines hedged on $200 oil how that turns out.

Instead, look at the facts of the mortgage market as they present today. 

• Mortgage rates are lower than they've been in years
• Mortgage guidelines are shutting down "prime" borrowers
• Home prices are falling nationwide, making qualification harder

If you think your mortgage rate is too high for this market, or just want an opinion, reach out to me by email or telephone and we can talk about it. 

If refinancing presents a clear benefit to you, I'll recommend you do it as soon as possible -- rates are still volatile and could rise overnight to price you out.  So, we take that bird in hand.  Meanwhile, if rates fall after closing, maybe reaching that mythical 4.500 percent number, we'll simply reconnect and refinance again.

I am a huge bird-in-hand guy.  If there's something available now, I will almost universally take it instead of waiting to see if something better comes along.  The only time I strayed from that rule was in the game of love and with respect to my wife.  I hope she did the same?

Okay, so, mortgage rates are down.  And, I mean down.  Levels not seen since February 2007.  And I am on the phone all day long with my clients, helping them to rebalance their mortgage debts and take advantage of lower payments.  We chat for a bit, review the benefits of a remortgage, I explain how am able to pick up their costs, and then we start working towards a 30-day closing date.

Nearly all of my clients go along with the plan because they want to save money wherever possible.  Especially because they're not increasing their loan balances.  Some, however, push off the remortgage because they want to wait for rates to fall farther.  This is where the disconnect occurs.

"It doesn't make sense to remortgage while rates are falling," some of my clients will say to me.  "I want to wait for some real savings."

I get that, but let's be real for a second.  Mortgage markets are a veritable mess right now and who knows what will happen to them after the next economic release hits the wires.  There's a chance to do some good today.  Don't miss that chance.

You know, it like my American Legion baseball coach Mr. Amman used to say (long before Kayne West), "nothing's ever promised tomorrow today".  Rates may be higher tomorrow and -- poof! -- there goes the savings.

If rates fall again down the road, then you remortgage again down the road.  The game is all about spending as little as possible on your mortgage debt so you can spend your money in more productive ways.  Even $500 annually can help fund a life insurance policy.  Lock up the savings while you can.

And back to the phones...

Today, in its Existing Home Sales report for June 2007, the National Association of REALTORS noted that mortgage rates are lower by 0.02% than in June 2006. 

I guess I knew that, but wasn't paying attention to it.  I had wrongly assumed rates were higher because this recent run-up was so long and extreme. 

Then, I looked back...

Last summer, mortgage rates rose steadily from mid-April until mid-July on (1) fears of inflation and, (2) a changing expectation of the Fed's next move. 

From there, it was a steady decline until March 2007 .  That's when the mortgage rate momentum reversed on (1) fears of inflation and, (2) a changing expectation of the Fed's next move.

Gosh, the more things change, the more they stay the same.

Monday, the Chicago Tribune sourced me in a story about the recent run-up in mortgage rates titled "Mortgage rates back near year-ago level".

Some of my quotes from the article:

"I don't think consumers are aware of what's happening," said Dan Green, a loan officer for Mobium Mortgage in Chicago. "It's just starting to become front-page news. Forty-five days ago, I was quoting 5.8 percent to people, and now I'm saying 6.6 percent."

It's a difference of about $156 a month on a $300,000 loan.

And why aren't consumers aware...?  Because they're not subscribers to The Mortgage Reports, of course.  <chuckle>

Because of rising rates, I also had this to say:

"If you pre-qualified for a loan in March or April or May, it's time to call your loan officer and get pre-qualified again.  You might find that suddenly your purchasing power has decreased."

Unfortunately, the article reports that "the rising interest rates are tied to yields on the 10-year Treasury note" and that is not completely true. 

Yes, mortgage rates tend to move in the same direction as the 10-year treasury note, but rates are determined by the prices of mortgage-backed securities, not U.S. treasuries.  That's okay -- a lot of reporters make that mistake.

And lastly -- as is usually the case!  -- since the article about rising interest rates ran in the Trib, mortgage rates have been improving across the board.  Funny how that happens.

In investment/trading circles, there is an expression: The trend is your friend.

I won't be posting today because the bottom just fell out of the mortgage bond market.  Yesterday, there was a respite from the on-going mortgage rates increases. 

Today is a different story.

As of 9:07 A.M. CT, mortgage bonds were off more than 40 basis points.  This should translate to a 0.250% increase for all conforming loans securitized by Fannie Mae and Freddie Mac.  I have a ton of calls to make today.

This isn't Boiler Room, it's what you need to hear.  Conforming 30-year fixed, 5-year ARM, 10-year ARM, you name it -- they're all getting bludgeoned.

Update 9:54 A.M.: Markets are now down 62 basis points.  Will the last one out remember to turn off the lights?

Update 11:31 A.M.: Markets are now down 78 basis points.  The next support levels are another 90 basis points lower.

Update 12:01 P.M.: Markets are now down 91 basis points.  This is like watching that scene in Swingers where Mikey leaves those voice mails.

Update Market Close: Markets were down 90 basis points on the day.  Looks like I picked the wrong week to quit sniffing glue.

I haven't seen carnage like this since Rob and Fab's career.

In the past 14 days, mortgage prices have given up close to 70 basis points.  Rates are up by as much as one-half percent.

There are a lot of reasons for the rapid spike in mortgage rates so pick your favorite two or three from the list below.  Amaze your friends at parties.

• Mortgage bond prices have moved below their 200-day moving average and program trading is adding to the sell-side pressure
• The dollar is off against almost every major currency
• Oil refineries are cutting supply, pushing gas prices higher
• Fears of wage inflation are supported by strong jobs data
• Forecasters are predicting an active Hurricane Season this year.  Milli Vanilli may have been right after all.
• Richmond Fed President Lacker says that the Fed may not be doing enough to stop inflation
• Central banks around the world are raising their respective interest rates, attracting buyers that may have otherwise bought US-dollar denominated securities such as mortgage bonds

Despite all of this, there may be chance that mortgage bonds are oversold.  This means that there could be a quick bounce/retreat in rates sometime soon, but there's no sense gambling on it. 

Get in and get locked, folks.  Floating a rate is too risky a proposition for most homeowners.

John posted a comment on Thursday's post, Like A Locomotive, Mortgage Rate Increases Are Picking Up Steam.   

"I am thinking of refinancing but do not want to be rushed into anything? Are rates going to rise that quickly? Who would you recommend I sign a mortgage with that you would trust?"

This is a very timely comment so my reply will be this post.  Thanks, John, for the terrific question.

The absolute bloodbath that occurred in mortgage rates today is one that we see maybe once per year, if that.  There was a turn in sentiment that was amazingly sudden and mortgage rates got murdered along the way.  We knew it could have happened, but today was really something else.

By the time the dust settled, mortgage rates were off by 0.25% across the board.  It was seriously brutal.

The worst part about it was that I spent most of the day on the phone with my new clients trying to explain the urgency of the situation.  Even though each was referred to me from a trusted source like a client or a real estate agent, none know me well enough to know my style.

I can only imagine what I sounded like to them:

"Look, mortgage rates are running higher and they're gathering steam.  You need to lock your right now because if you don't, you will pay a higher rate.  And I'm not even talking about if you lock tomorrow.  You're going to pay it an hour from now."

Sounds like Boiler Room, right?  Well, when it's an urgent message, I don't how else to get my message across. 

I also tried email reminders about the market and then stopped just short of sending the Pony Express to their places of work.

From my vantage point, I am presenting facts and I am the one in the relationship with the live bond feed coming across my desktop. 

It's my responsibility to make sure that the client hears the news that I intend to deliver.

Now, the clients that have worked with me before and who know how I operate?  They all locked in before the real damage was done.  Each of them got their rates while the going was still (relatively) good.

The clients with whom this is our first dance?  Not one of them. 

I watched their dollars just float away while they looked at me as if I were a high-pressure salesperson.  It's really a shame.  I don't know how else to say "YOU'RE MAKING A BAD DECISION BY WAITING" other than to just say it.

Can I blame the first-timers for not trusting me?  It really does sound "high-pressure" -- regardless of the trust that we may have already built together.  Sad, but true.

One client in particular that didn't respond to my calls or emails no longer qualifies for the home that he is under contract to buy; his debt ratios were so precariously tight.  Now, he'll have to pay points to lower his interest rate so he can get approved.  That will cost about $3,500.

So, John says he doesn't want to get rushed into anything and that is understandable.  Nobody likes to be rushed to make decisions -- especially ones that deal with hundreds of thousands of dollars in debt. 

But, today was a day, though, in which "not rushing into anything" was very costly for a lot of people.  I am not going to ask for comments, but I am sure that every loan officer reading this post will have at least one similar story from today.

On days like this, John, you just need to know that you're working with a Trusted Advisor and you have to be confident in their willingness to look after you.  As for finding an advisor you can trust, ask around in your circle of friends, family and co-workers for somebody who fits the bill.

Existing Home Sales showed weaker-than-expected numbers this morning, but that hasn't stopped the recent slide in mortgage-backed securities.  This is a counter-intuitive so let's take a deeper look.

First, the supply of homes dropped from 7.3 months to 6.8 months.  With less supply, there is a tendency for home values to stabilize and that is exactly what is happening.  Median home prices are turning flat versus the year-over-year declines during the last quarter of 2006.

Additionally, there is a growing feeling that the housing market has already bottomed-out and that the worst is behind us.  A re-energized housing market will fuel additional economic growth in 2007.

Markets are slowly convincing themselves that inflation is seeping back into the economy and they expect that the Fed's rate-setting Open Market Commitee will confirm that for them at their meeting next week.

Because of those inflation expectations, between now and the FOMC's adjournment January 31, mortgage rates can only stay flat or move higher.  It would behoove rate shoppers everywhere to lock their mortgage rates as soon as possible.  The more traders that place bets on inflation, the more likely that mortgage rates will head higher in the interim.

Already today, mortgage rates are moving with gusto and may be subject to worsening mid-day repricing if momentum trading picks up any steam.

After Thursday's data releases showed strength, mortgage rates are heading into the last trading day of 2006 up more than 0.375% on the week.  That's a lot for a normally sleepy week.  The broad shift in rates is a more a function of market liquidity than of economic fundamentals.

Tuesday's blowout New Home Sales figures were buoyed by Thursday's similarly strong Existing Home Sales figures.  In addition, Consumer Confidence registered its highest value since April, right before gas prices began their push towards $3.50 per gallon.

The third surprising number was a manufacturing index that rebounded from a three-year low to surprise markets by blowing out November estimates. 

In isolation, each of these reports has the power to shift mortgage rates.  But, all three released within hours of each other (as it was yesterday) can really make a difference in weeks like this.

With so many traders on vacation this week, there are fewer buyers and fewer sellers at any given price point for mortgage bonds.  Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price. 

This is the concept of liquidity and it's easier to understand in the context of eBay.  The more people that use eBay, the more valuable it is for everyone that uses it because there is a much greater chance that there will be a buyer for every item listed at every given price.  Both the buyers and sellers benefits. 

With an already-fragile market psyche, the market's lack of liquidity because of vacationing traders is causing what looks like an over-reaction to economic news, but is really just market forces at work.  There just aren't as many sellers willing to sell at the given prices that buyers want to pay.

This forces prices for mortgage bonds move wildly and is the reason why rates have moved so much this week.

Markets are closing today at 1:00 P.M. EST which means that even fewer traders will show up at the office.  Expect continued volatility.

The reversal didn't take long.  After Wednesday's Retail Report scared markets into a tizzy, today's Consumer Price Index calmed them considerably and reversed the upward trend seen over the last 48 hours.

With a flat reading of 0.0%, CPI was lower than the 0.2% expectation of 0.2%, but based on the swift reversal, it appears that the expectation was even higher than that.  Too many traders got caught leaning the wrong way and mortgage rates tumbled as they corrected their positions.

A flat reading on CPI lowers the year-over-year Core CPI growth to 2.6%.  This is not optimal, but it's low enough to please the Fed (for now).  Over the past few months, Core CPI (which excludes the price of food and energy) has clocked in at 0.2%, 0.1% and 0.0%.

Looks like a soft landing.

Today's retail sales report suprised to the high side this morning and the markets are reeling in response. 

Expecting a modest increase of 0.2%, markets are reacting to an actual figure of 1.0%.  Perhaps this is the result of lower gas prices throughout October and November, or maybe it's an advance on the seasonal shopping.  If it's the latter, December's number should be relatively weak because of cannibalization. 

Less than two hours into the day, mortgage rates are up by 0.125%.

Strangely, mortgage rates are up by as much as 0.250% today.  I can only assume that lenders are protecting themselves against future movements in price because the calm activity in the mortgage-backed securities market shouldn't warrant such a drastic change. 

This is one way in which expectations of a future event can actually make them happen.  Lenders are worried that rates should be higher down the road, so they raise them today.  Those higher rates put pressure on the economy and when the future date arrives, the lenders are "proven" correct because the market has reacted to their changes. 

It's a giant circle, around and around we go.

If you're in the process of buying or remortgaging, hopefully you locked you rate yesterday.  If not, never fear... The Fed meets Tuesday and expectations coud shift again.

Flash back to June 30, 2004.  The Fed Funds Rate was 1.000%.

June 30, 2004 was the date of the first of 17 consecutive increases to the Fed Fund Rate.  At the time, the 10-year treasury note was yielding 4.59%.

Today, with the FFR standing at 5.250%, the 10-year treasury is yielding 4.42% -- a drop of 17 basis points.

The FFR is the ultimate short-term interest rate; it's the cost to borrow money overnight, risk-free between banks.  The 10-year treasury, on the other hand, is longer-term.  In fact, it's like 10 consecutive years of overnight rates.  It's also considered to be risk-free.

Because the 10-year note is lower than the overnight rate, we can infer that markets believe the cost of overnight money will decrease over time, averaging 4.42% over 10 years.

Markets are already predicting with 60% probability that the FFR will be lower in March 2007 than it is today.