Mortgage rates reached record lows this week because of cuts in the Fed Fund rate and the drop in Treasury rates.  Still, rates have not dropped as much as would be expected. 

"Interest rates for 30-year fixed-rate mortgage rates fell for the seventh consecutive week, moving these rates to the lowest since the survey began in April 1971," said Frank Nothaft, Freddie Mac chief economist. "The decline was supported by the Federal Reserve announcement on Dec. 16, when it cut the federal funds target to a record low and stated it stood ready to expand its purchases of mortgage-related assets as conditions warrant."

Rates on 30 year mortgages fell below 5.47% APY.  Last year, the 30 year rate averaged 6.14% APY.  The 15-year fixed-rate mortgage averaged 4.92% with an average down from last week when it averaged 5.20%.  That's the lowest it's been since April 1, 2004, during the historic wave of refinancing that helped create the housing bubble in the first place.

Despite these low rates, they should be even lower based on Treasuries and the Fed Funds rate.  Bloomberg reports that:

"While the average rate on a fixed 30-year mortgage fell to 5.18 percent last week from 6.47 percent in October, according to Mortgage Bankers Association data, the historical relationship between home loans and mortgage bonds shows rates should be at least half a percentage point lower. Though the U.S. is paying nothing to borrow in some cases, homebuyers are paying about $730 more a year than they would otherwise on a $200,000 mortgage."

Like with savings rates and cd rates, banks are not lowering mortgage rates to correspond with their typical benchmarks.  Part of this is fear and risk aversion on the part of depistors and lending instutions.  Part of it is that historical comparisons are not valid.  The guts of Wall Street and banks have been destroyed over the last six months and the system no longer functions like it used to.  The death of securitization means that banks needs to their loans on their balance sheets, making them extra cautious of the rates they provide and who they lend to.  It also means they need more funds, deposit funds to support their balance sheets.  All of this is pushing rates higher than they would have otherwise been.

It's also a reason why the Fed has stepped into the role of securitizer.  Its has been purchasing assets from the banks for some time and now is signaling that it will begin to purchase mortgage assets.  That should help to lower rates further.