Mortgage rates in the U.S. are ignoring the Fed

The Board of Governours of the Federal Reserve System have slashed interest rates by 325 bp to 2 percent since the credit crises took off in August of last year. The Treasury 10 year Note has bottomed at about 3.3 percent and currently yields 3.8 percent, still lower from the 4.7 percent a year ago. As the chart below shows mortgage rates continue to move higher. The national 30yr fixed mortgage is at 6.4 percent higher than the 6.2 at the end of August 2007. Mortgage rates are moving up on a broad basis while Treasuries are subdued and the Fed has lowered real interest rates into negative territory. It is all but clear that the Federal Reserve is powerless in providing incentives for a turn-around in the beleaguered housing market.
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The reasons for this are less understood, but could it be that behind all the mortgage woes lies a flawed business modell? The biggest driver in the US housing market over the last 10 years was the ability for lenders to securitize loans to borrowers and resell them to investors in the secondary market. This scheme was pursued mostly by investment banks on Wall Street and contributed substantially to the exorbitant profits in these firms. Eventually securitization has been exposed as a ponzi-scheme and securitised mortgage products are in the heart of the perpetual drive to deleverage the balance sheet of financial institutions. A look at From 10-Q from Merrill Lynch, Lehman and Goldman Sachs reveals a stunning drop-off in cash flows received from securitization transactions within the last 12 month. As of June 27 2008 Merrill raked in only $16.9 billion in securitizations down from $128.1 billion a year earlier. Lehman manged $8.1 billion down from $43.6 billion and Goldman $3.9 billion down from $21.3 billion in securitized cash flow. The failure of the secondary mortgage market has put the brakes on the ability of the Fed to influence mortgage rates and consequently a swift recovery on the housing market.
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source: MERRILL LYNCH & CO., INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2008
http://ir.ml.com/sec.cfm

source: LEHMAN BROTHERS HOLDINGS INC. FORM 10-Q,
FOR THE QUARTER ENDED May 31, 2008
http://www.lehman.com/shareholder/10k10q/#

source: THE GOLDMAN SACHS GROUP, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED MAY 30, 2008 http://www2.goldmansachs.com/our-firm/investors/financials/current/10q/10-q-2-quarter-2008.pdf