Picking through the pile of offerings that claim to help struggling homeowners, there is still sadly very little of substance. Billowing columns of smoke, but no fire.  I do have some hope that after all the cash we’ve thrown at the banks, somebody will be embarrassed enough to figure out a way to stop the foreclosure hemorrhage before the patient dies. As much as it makes common sense, the prevailing logic–that banks will lose less money helping homeowners than they will foreclosing–just isn’t playing well with that audience.

Sure, there is a moral hazard to contend with, along with the potential for gross inequity. How do we distinguish the deserving from the undeserving? Everyone is struggling right now. So how will the responsible homeowner feel if help ultimately goes to the profligate neighbor who sucked out their home equity to buy more toys? So I understand this is a tough one, but meanwhile…

THE BAILOUT: BANKS BUYING BANKS

We all have misgivings about the bailout. How could things have suddenly gotten so bad that we needed to cough up $700b in two days or the sky would fall in. After it didn’t fall in and after the EU’s decisive action forced Paulson to restructure from “bailout” to “buy in”, the immense cash infusion still failed to restore investor confidence and unfreeze the credit markets.

And there was Allen Greenspan claiming “shocked disbelief” at the banks’ failure to self regulate and admitting that the whole greedy affair represents a failure of the ideology of unregulated free markets. Don’t get me wrong. Capitalism is good. But adult supervision is needed to avoid the Lord of the Flies ending we have just witnessed.

And finally to my point. One of the things that the bailout did very quietly was to open a tax window that allows profitable companies to buy unprofitable companies and write off the latter’s losses to avoid taxes. The estimated $25b in tax savings may have induced Wells Fargo to pay only $13b for Wachovia. But that corrupts the intent of the bailout and costs the taxpayers more.

And in the long run, further consolidation in the banking industry is exactly what should not be allowed to happen. Fewer, larger banks mean more of the same kinds of trouble. What comes after “too big to fail”? Maybe “too big to save”. Now that’s scary.

To forecast mortgage rates, astute borrowers have traditionally watched a variety of signposts including the 10 year Treasury, the Fed, the stock market, inflation, and any of the weekly reports that might reveal whether inflation or a slowing economy was gaining the upper hand.

Forget what you thought you knew about predicting rates.  The tea leaves aren’t talking.  The bungled bail-out, the subprime-turned-general-mortgage crisis, the wildly gyrating stock markets, the global credit freeze, and plummeting consumer confidence have created a perfect storm of uncertainty.  And it seems that no matter what the latest news says or how much the fed cuts short term rates, mortgage rates stubbornly refuse to fall.

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The calls are coming in fast and furious today.  The excitement is palpable, the conversations always pretty much the same:  “I heard the Fed cut mortgage rates by 1/2 point!”

These Fed announcements cause much confusion among consumers.  And although I’ve written about this many times, I can’t find those posts quickly in my archives right now.  So instead of trying to link back, let me clarify a bit.

The Federal Reserve does not raise or lower mortgage rates.  Instead, the Fed tinkers with two key rates:  the federal funds rate and the discount rate.  These maneuvers are part of the the Fed’s open market operations that regulate the supply of money in the economy.   When the Fed thinks the economy needs a little goose in the form of cheaper money, it lowers the fed funds target rate, exactly what happened today.

The federal funds rate is the rate that banks charge each to borrower money overnight.   Why would they do that you ask?  Well, because banks are required to keep a percentage of their total deposits in the form of cash, so that you can walk in and get at your money if you need to.  And as they take in or release deposits, make loans, and so on throughout the business day, the amount of required reserves varies.  At the end of the business day, if they have more than they need they can loan it out overnight and make a few bucks. If they have less than the required amount, they borrow it from other banks.

The discount rate is very similar, except that it is the rate at which the banks can borrower directly from the Federal Reserve.  It is normally about a half point higher than the Fed Funds rate.

So no, unfortunately, mortgage rates did not fall today.  In fact they went up a little.  The price of the Fannie Mae 30 yr 5.5% coupon rate, which is most closely associated with 30 yr fixed mortgage rates, was lower in price by 15/32nds at day’s end.   When the price is lower, the rate is higher.

Rates have been incredibly volatile since Fannie Mae and Freddie Mac were nationalized.  And remember that the bond market generally works in counterpoint to the stock market.  So a good day for stocks often means a bad day (think higher mortgage rates) for bonds.  A bad day in the stock market sends money scurrying to the safety of bonds, often U.S. treasury securities (think lower rates).

Today, the trend appears to be toward higher rates due to an underlying concern that all the stimulus enacted recently–$160 b for tax payers earlier in the summer, $700 b to bailout Fannie & Freddie, nationalization of AIG, and lower short term rates–will eventually overstimulate the economy and cause inflation to rear its head.  When signs of that materialize, the Fed will have to start raising the fed funds rate again.

Although we’re sure to have moments between now and then where rates drop for an hour or a day, the trend is higher.  Timing the market perfectly is impossible. If you’re in Contract to buy or you’re starting a refinance, I recommend locking in your rate now.

Volatility in mortgage rates resembles nothing so much as the hurricane force winds blasting Gulf coast & Eastern seaboard, first blasting one direction then the other.  It has become difficult to quote rates without being wrong a half an hour later when lenders reprice yet again.

Consumers have a hard time with this.  But, combine advertising (institutionalized lying)  with this kind of volatility and you get such poor quality information that making a good decision becomes challenging.   I completely support the idea of becoming a wise and educated shopper where important financial decisions are concerned, but it is best to stick with trustworthy sources.

So here’s one.  Each Thursday, Freddie Mac publishes a weekly survey of mortgage rates.  This last week’s average 30 year fixed rate mortgage was 6.10% at .6 points.   Use this as a benchmark.  If the quote you  receive varies a lot from what you see here, it may have hidden costs or requirements.   They also provide a decent summary if you want to know a little more about what was influencing rates.

Check it out if you want to have a good general of rates and recent trends, and the spread between the various fixed rates and adjustables.  Although rates can vary during these volatile times, this is a reliable place to start.