"Fast forward to today," says Kenneth Thomas, a lecturer in finance at the Wharton School of Business at the University of Pennsylvania. He points out that investors around the world continue to buy Treasury debt, keeping yields low. But their reluctance to buy mortgage debt keeps mortgage rates higher.
"Mortgages are now considered riskier than they used to be," Thomas says. "That's one of the biggest factors in this credit crunch."
He cites the Fed's quarterly bank survey, in which 75 percent of lenders said they tightened mortgage lending standards in the second quarter of this year. "The tightening comes in many ways, including higher rates," Thomas says.
Stricter and more expensive
So Beijing has a hand in raising mortgage rates with its reluctance to buy American mortgage debt, and Seattle and Charlotte play their part, as major banks raise mortgage rates to compensate for a perceived higher risk. The global financial system ties these decisions together.
This might seem strange if you applied for a mortgage five years ago and again recently. Lenders have become stricter -- demanding better documentation of income and assets, and requiring bigger down payments. Today's new mortgage almost certainly has a smaller chance of going bad than a typical mortgage underwritten three years ago. If they carry less risk, why don't rates fall?
"To me, it says the banks are holding more of the profits on these mortgages to make up for the losses that they've experienced over the last several years," says Moulton, of Americana Mortgage.
Maybe he should blame Freddie Mac and Fannie Mae. The government-sponsored companies guarantee and securitize mortgages, and this year they have added fees (such as "loan level price adjustments" and "adverse market charges") that lenders pass along to borrowers, usually in the form of higher rates. The fees supply Fannie and Freddie with cash to fend off a government takeover. They probably wouldn't have such pricing power if they had more competition.
Banks, on the other hand, have plenty of competition, Walters says. "It's still a very, very competitive market, and that keeps rates, from our perspective, low," he says. "You don't see anybody gouging out there. If they do, they'll lose -- because the customer will go somewhere else."