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Mortgage Q&A: Loan rates are beyond politics

- - Thursday, November 15, 2012

One of the most common comments I heard from potential refinancers over the past eight months was this: "They're not gonna let mortgage rates go up right before an election."

Everyone seemed to say that, and frankly, I never understood why. Long-term interest rates, including those for 15- and 30-year mortgages, are governed largely by market forces. Assuming "they" meant the president, I really don't think President Obama, or any other incumbent president seeking re-election, would have the power to control long-term interest rates.

I'm no economist, but let me give you my thoughts on what moves long-term fixed rates.

A mortgage with a fixed interest rate is an investment similar to a U.S. Treasury bond. T-bonds are considered to be one of the safest places to put your money. A mortgage secured against American residential real estate also is considered to be a safe investment. (At least it was before the mortgage debacle, but that's a subject for another column.)

The point is that mortgage rates largely follow the movement of U.S. Treasury yields. Let me give you a sampling of what can influence T-bond yields:

Chinese investors lose their huge appetite for U.S. debt. Mortgage rates would rise because the demand for U.S. Treasuries would fall.

The ailing economies of Greece, Portugal, Spain and the like get worse. Mortgage rates would fall because worldwide investors, seeking a safe haven to park their money, would invest in the relative safety of U.S. debt.

The economy shows signs of inflation. Mortgage rates would rise because the value of fixed-yield debt, such as T-bonds and fixed-rate mortgages, falls when inflation kicks in. Investors would sell their fixed debt, which would result in higher rates.

The economy falls into a recession. Mortgage rates would fall because investors would lose their faith in corporate earnings, sell their stocks and buy Treasury and mortgage debt for a low, but safe, return.

I could go on and on. The bottom line is that even the president of the United States doesn't have the power to control these things.

But the government tries. The Federal Reserve Board recently implemented another round of "quantitative easing," in which it buys huge amounts of Treasury debt and mortgage-backed securities in hopes of creating demand, which would make rates fall.

Predictably, interest rates fell slightly after last week's election results.

The Democrats are more willing to use government forces to stimulate the economy and keep rates down. The Republicans are more likely to let market forces take over and eliminate any government intervention.

Only time will tell where rates are headed. Most TV talking heads predict a gradual but minimal rise in 2013. Others are predicting that rates will fall even further.

As for me, I'm guessing they're going to stay in a relatively narrow range over the next 12 months. But I wouldn't bet on it.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.