Today’s mortgage bond market is moving relatively flat awaiting news from the FED’s meeting this week.  The Federal Funds Rate currently sits at 1% (the prime rate, currently at 4%, is always 3% above the Federal Funds Rate), and analysts predict that a .50% drop is virtually a lock with a 70% chance that the drop may actually be .75%.

This means that the rate on your equity line of credit, and your credit cards that are tied to the prime rate will likely be going down this week.  Before you jump for joy that mortgage rates are going even lower, remember that mortgage rates are based on the sale of mortgage bonds and mortgage backed securities, not the Federal Funds Rate.  In fact, most projected Federal Funds Rate cuts are already priced into the market by the time they are made public, so the immediate reaction for mortgage rates is often negative.

Adding some pressure to the mortgage bond market is the newly discovered Bernie Madoff “Ponzi Scheme”.  A Ponzi Scheme is an investment vehicle where the first investors are given an artificially high rate of return based on proceeds recieved from new investors (similar to a pyramid scheme).  There is nothing new about ponzi schemes, but what is alarming is the number of people involved with this one, and the number of “savvy investors” with large holdings that were involved.

Because some hedge funds and institutional investors were involved, this could actually have an effect on the mortgage bond market as many will be forced to liquidate other assets (such as mortgage bonds and mortgage backed securities) to help cover the losses received through this “scheme”.

All this combined with the SEC making a decision on Mark To Market accounting in the coming weeks should add significant volitility to the markets going forward.  Watch mortgage rates closely as they could change wildly and with little notice.