Why haven't mortgage rates declined?
By Holden Lewis • Bankrate.com

The Federal Reserve began to slash short-term interest rates almost a year ago. Yet we have higher mortgage rates now than we had then. What gives?

No single answer explains why some rates have fallen while fixed mortgage rates have climbed from an average of 6.43 percent a year ago to 6.6 percent this week. Among the several reasons, you can sum up the main one in two words: credit risk. Lenders behave cautiously now because they lent recklessly in previous years, leading to a surge of foreclosures.

What rates have done
Traditionally, observers noted a link between 10-year Treasury notes and 30-year fixed-rate mortgages: When the 10-year Treasury yield went up, the 30-year mortgage rate went up, and when the Treasury yield fell, so did mortgage rates. That linkage has broken.

Consider two dates, a little over a year apart, when mortgages had the same rates in Bankrate.com's weekly survey, while the 10-year Treasury yield dropped more than a percentage point:

• On Aug. 8, 2007, the 30-year fixed averaged 6.66 percent, and the 10-year Treasury note yielded 4.85 percent.
• Fifty-four weeks later, on Aug. 20, 2008, the 30-year fixed averaged 6.66 percent again -- and the 10-year Treasury yielded 3.79 percent.

Bankrate's mortgage rates vs. 10-year Treasury and Fed rate

Between those dates, the Fed made a drastic series of cuts in the federal funds rate. That rate, also called the overnight rate, stood at 5.25 percent a year ago. From mid-September to late April, the Fed chopped it to 2 percent in a bid to stimulate the economy. It remains 2 percent.

Million-dollar conundrum
"The perception is that mortgage rates should be lower," says Bob Moulton, president of Americana Mortgage, a brokerage in New York. Why haven't mortgage rates fallen along with Treasuries? "That's the million-dollar question," he says.

Today's rate puzzle seems sort of the flip side of the "Greenspan conundrum." From June 2004 to June 2006, the Fed hiked the federal funds rate from 1 percent to 5.25 percent. Most people assumed that long-term interest rates and bond yields would rise, too. But they fell. Alan Greenspan, who was chairman of the Fed at the time, famously told Congress in February 2005 that "the broadly unanticipated behavior of world bond markets remains a conundrum."