Is the government holding down mortgage interest rates?

One way to re-start the housing sector and thus a big part of the American economy would be to assure that mortgage quotes were as low as possible. And given that banks today can borrow money at pretty close to zero, is the government now forcing down mortgage rates to 5 percent or less?

The short answer is that mortgage rates move on their own, with very little impact from the government.


Investors looking for mundane, low-risk returns generally have a choice between 10-year Treasury notes or 30-year mortgages. The two investments compete because 30-year loans are rarely outstanding for their full term, homes are typically sold or refinanced long before 30 years.

The result is that risks and rates for the two forms of investment are fairly similar so investors will move their money to the option which is best for them.

But can’t the government force mortgage rates up or down?

Oil & Energy

To answer this question take a look at oil prices. It would be very much in the interest of the United States to force down oil prices given that higher energy costs hurt our balance-of-payments, fuel inflation and are, essentially, a tax on every household. But the government — regardless of which administration you choose — has little to no leverage with suppliers such as our good friends and allies in Saudi Arabia, Iran and Venezuela.

Another part of the puzzle is that we value oil in terms of dollars. This is very good for the US, so naturally there’s a movement by Iran and others to measure the cost of oil in some other currency. In effect, one reason the price of oil has gone up is that each dollar buys less as a result of inflation over time. The way for energy producers to combat this loss of buying power is to raise oil prices.

For instance, oil futures have recently been priced at $99 a barrel. That’s in 2011 dollars. Corrected for inflation this $99 has the same buying power as $77.96 in 2001.


Inflation to some extent is really not a problem — as long as your income keeps up. Unfortunately that has not been the situation for most American households.

Those with a household income of $52,587 in 1999 were likely to earn $50,303 in 2008.

Government-Set Rates

What the government could do — and what the government used to do — is set interest rates, not for all mortgages but for federally-insured mortgages such as FHA mortgages and VA financing. In fact, HUD actually set FHA mortgage rates until November 30, 1983 while the VA set rates until October 28, 1992.

Investors could then support government-backed mortgages or not — remember the government cannot compel investors to invest. If the market response was a fat “no,” if the set interest level was too low, then the government would have to raise the official rate. Such a system would effectively create an offer which investors worldwide could accept or not accept.

Of course, if the government again set mortgage rates for FHA and VA loans the public would readily know how much to pay for real estate financing. It’s an idea that worked well in the past, so why not now?

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Posted in: Mortgages

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