Why aren’t mortgage rates lower?

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Good morning. Conventional wisdom has it that mortgage rates generally follow the rate on 10-year Treasury bonds -- as that rate rises and falls, so too do mortgage rates. So why is the gap between these two rates widening? Mortgage broker and Fed Watcher Lou Barnes weighed in this weekend:

‘Under normal historical circumstances, the 10-year should lead retail mortgage rates on a leash no longer than 1.50% to 1.75%. We’ve taught a generation of borrowers that wherever the 10-year goes, mortgages are sure to follow. Since the onset of the Crunch in August, frightened money has gone to the 10-year, but mortgage rates have been sticky. For the last couple of weeks, the 10-year at 4.25%, the retail rate for the lowest-fee 30-year mortgages has been stuck at 6.375%. A spread wider than two percent! Why?’

More: ‘I posed the question to a kid running a trading desk (in his 20s, already a Master of the Universe). ‘There’s too much production for demand.’ Son, don’t fib to an oldster: the production of mortgage-backed securities has crashed by two-thirds since August. ‘So? I said there was too much production for demand.’

So there you have it: in Barnes’ view, even though production of mortgage-backed securities has dropped sharply -- by more than half -- investor demand has dropped even more. Mortgages, as Barnes writes, are still ‘toxic.’ The Fed can cut the cost of money, but it can’t force investors to buy a product they don’t want.

The good news, though: Barnes sees mortgage rates heading lower -- just not quite as fast as history indicates they would be right now.

Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.