Q. What is the 30-year mortgage rate based on?

-Johnny B

A. Typically, the 30-year mortgage rate is based on the sum of 1) the 10-year Treasury yield, 2) the risk premium on mortgage bonds guaranteed by Fannie and Fredie, and 3) bank fees and charges. While the government has been focused on driving down the premium paid on mortgage bonds, which is good for homebuyers, there has been upward pressure on Treasury yields, which is bad for homebuyers and rate watchers, as the government borrows massively to fund its stimulus package. If the government wants to drive rates to 4% or 4.5% to attact homebuyers into the housing market, it most likely will have to be the biggest investor in these low-priced loans, because private investors will demand higher returns for tying up their long-term money. As a result, such an incentive-laden program, while well-intentioned, could cost the goverment, and, yes, taxpayers, trillions of dollars.