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Comparing Interest Rates Then and Now

August 09, 1992

The Consumer Affairs column item, "Why Home Interest Rates Are Still High" (July 10), seems to support an erroneous statement by Bob Heady of the Bank Rate Monitor newsletter regarding the relationship of mortgage rates to short-term savings rates in 1963 and today.

The truth is that banks and savings and loans have absolutely nothing to do with consumer fixed-rate mortgage levels.

The vast majority of fixed-rate mortgages are placed in securities and sold on Wall Street into the general securities market. Thus mortgage rates are dictated by long-term bond rates with similar terms to the mortgage. The bond rates, in turn, are dictated by actions of the Federal Reserve, investor perception of future inflation, and other external factors.

All long-term market rates--bonds, mortgages and treasuries--are high relative to short-term rates if you compare today to 1963. This phenomenon, commonly known as a "steep yield curve," results from investors requiring a higher yield based upon inflationary expectations.

More interesting is the fact that mortgage rates relative to other similar long-term bond and treasure rates are much cheaper today than in 1963. In 1963, the 5.9% fixed-rate mortgage you describe was nearly 200 basis points (two percentage points) over a comparable term Treasury. Today, that differential has been reduced to less than half.

The reason is that Fannie Mae and Freddie Mac have created and guaranteed mortgage-backed securities with fixed-rate loans supplied to them primarily by savings and loans. By creating these securities, they access funds at a rate much closer to the Treasury rate, and that beneficial rate is passed on to the consumer in their loan rate.

This comparison between similar term market rates in 1963 and today is the relevant comparison, rather than looking at short-term savings rates versus long-term fixed mortgage rates.


Santa Monica

The writer is director of strategic planning at First Federal Bank of California.

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